Even among other Big Tech favorites, stocks Pay Pal (NASDAQ:PYPL) have performed very well in recent months. PayPal stock has risen more than 37% since November. To some extent, this is due to its exposure to the cryptocurrency megatrend. This can be a cause for concern, with bitcoin (CCC:BTC) and other major cryptos corrected in recent days. We could see another bitcoin bubble burst, much like the one experienced in 2018.
That being said, bitcoin’s price movements may be a non-factor here. Last year, PYPL’s rival, Square (NYSE:SQ), bought a $ 50 million block of bitcoin for investment. However, PayPal has yet to take a similar step.
Moreover, the bull’s case does not completely depend on its crypto catalyst. The company’s exposure to the continued digitization of financial data remains the main bullish factor for the company.
There is no doubt that the company will continue to gain traction in the financial services industry. Still, that doesn’t guarantee that its stock, which trades at around $ 247 per share, will continue to rise in the near term. Much less, hit a recently touted price target of $ 300 per share.
Why? So far, valuations have not cut hair on the sparkling futures multiple of this stock. But that could change in the coming months. Equities have a lot of wiggle room if the markets correct.
So, after his incredible run, what’s the game here? Take the opportunity to cash in as stocks remain close to historic highs.
Catalysts for PayPal actions are fully priced
I can see why investors remain very excited about this stock. On the bright side of the trends, the company has a good chance of meeting its current very high expectations. When it comes to crypto (despite the recent correction), the payment platform could find huge opportunities here.
In fact, even with the stock record lately, one analyst argued that its crpyto tailwinds are not yet fully integrated into PayPal stock. I’m talking about BTIG analyst Mark Palmer, who recently upgraded stocks to “buy,” giving the stock a price target of $ 300. With the platform’s massive user base now capable of trading cryptos, and soon able to transfer cryptos through its peer-to-peer transaction platform Venmo, the company could profit as intermediate in this fast growing alternative asset.
Along with the potential benefits of crypto, the company’s long-standing catalyst – the digitization of financial services – also remains in motion. Earlier this month, Investor place ”s Faizan Farooque explained how the company’s disruption of the “old-fashioned” financial services industry paves the way for continued growth over the coming year.
The problem? These two factors are more than reflected in the current price of PayPal shares. So far, valuation issues have done little to scare investors off. But that could change in the future.
This high-priced stock could drop if markets correct
Trading for a futures price-to-earnings (P / E) ratio of 56.18, PayPal stock is by no means cheap. This in itself is not of concern. Depending on the expected growth of a business, a rich premium may be justified. But, on closer inspection, it is difficult to justify its current multiple.
As In search of the alpha discussed at the end of December, PayPal’s valuation has largely exceeded its fundamentals. The stocks appear to be overvalued relative to both its projected growth and its major peers.
To be sure, valuation continues to trump growth, or at least the perception of growth, in the current stock market. But that could change in the coming months. With investors rotating from Big Tech winners and towards other opportunities, we may see downward pressure on stocks going forward.
Even worse is the risk that stocks in general, and tech stocks in particular, are about to correct themselves. Given that PayPal stock is trading well above its historic P / E ratio today, stocks could drop significantly if the markets see a sell off.
Consider selling in today’s strength
I think maybe PayPal is more likely to take a big crash rather than rally more in the short term. But do not think that this means that it is wise to sell this stock short as a bet on a possible market correction.
Timing the market is much more difficult than it looks. And, generally, not a winning strategy. Predicting when (or if) a correction is imminent is even more difficult. The galloping bull market in tech stocks can look like running out of gas. But it remains to be argued that this sector will continue to outperform.
Still, for those who bought less, one bird in one hand may be worth two in the bush. Given its foamy valuation, the potential losses can far outweigh the potential gains during the rest of the year.
So what’s the best move? Sell Strong with PayPal Stocks.
As of the publication date, Thomas Niel held a long position in bitcoin.
Thomas Niel, contributor for InvestorPlace.com, has been writing individual equity analyzes for online publications since 2016.