Is Paypal in Trouble?
Summarizing last week’s trading, the large-cap S&P 500 added .07%, the Nasdaq 100 increased by 2.03 %. The DOW was down -1.79%.
Those who control the supply chain will win
CEO Doug McMillon of Walmart made a statement this week, “Fighting inflation is in our DNA.” Walmart claims their inventory is up 11.5% over this time last year as they prepare for holiday shoppers. If we look at large retailers like Walmart, The Home Depot, and Target, they have a distinct advantage to smaller retailers when it comes to getting products in a broken supply chain. They have been chartering their own ships to deliver goods in time for the holiday season. The cost to lease a ship runs about $1 million to $2 million per month, but unlike smaller retailers, big box stores have the war chest to fight that battle. Customers will go where they can find the products they desire. As a result, we believe these types of businesses will continue to acquire more market share. This is not good news if you are directly competing against these retailers, but if you are a shareholder, Walmart, The Home Depot and Target appear to have long runways ahead of them. If you missed the discussion, you can find it here: https://open.spotify.com/episode/0kUG6lYbZxNP4JUMAnVkev
Rocky they are not.
What happens when a 44 year old and a 17 year old trash talk about who is faster? https://www.instagram.com/p/CWdusCiDMrc/ I admit he may have edged me out by a few inches but I’m bringing my tennis shoes next week so, Caden, start stretching.
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Weekly Wisdom
Your breath is a great source of focus because you take it with you wherever you go.
I can’t take the credit for that one. I wrote it down sometime in 2020 but failed to write the author. Whoever it was, he or she was spot on. There are those who can slow things down when the world seems to be in fast-forward. By doing so they can act with thoughtful action. When the heart starts to race, and the mind starts to wander, taking a few seconds to take deep breaths can help reset your thoughts so that the moment is not too big.
When your Garage is also your Shop
We have a number of clients who have home-based businesses. It’s not uncommon for a concrete contractor or landscapers to store their equipment in a detached garage. If this is the case, you may consider insuring that detached structure on your commercial insurance policy. There are several benefits to doing so. 1) A homeowner’s policy is not the best source for providing business insurance coverage. In fact, depending on what operations are taking place in the detached structure, there could even be exclusions. A commercial policy is specifically designed to insure against commercial loss exposure. 2) Insuring the detached structure on your commercial policy can help protect your homeowner’s policy from claims. 3) There may be expense advantages to shifting the payment of insurance from your personal name onto the business.
PayPal is Down 38% From its All-Time High! Is it a Buy?
When we sit down with new clients who are building a financial plan from scratch, we emphasize in great detail that the probability that you will go through life without experiencing a significant market correction or crash is extremely close to 0. It is a byproduct of our capitalist system, price and value are not the same things. To quote the great and powerful Warren Buffett “Price is what you pay. Value is what you get.” When there is a discrepancy between price and value there is either an opportunity or a bubble. Look at the correction we went through in 2020, and let's pick a stock to be a case study to illustrate the point.
Let's take Amazon.com. If you purchased the stock at the local peak right before the crash you would have bought at $2,134 and you would have seen your position decrease by16% in a matter of a day. What changed with Amazon as a company? Not much, they are still shipping out millions of products and as a matter of fact are in a better position going forward with lockdowns, online shopping, Amazon Web Services, etc. to benefit from the situation. Price did not equal value, and for those who had the foresight and temperament to seize the opportunity your $2,134 investment would have increased 74% in a little over a year. This was a massive opportunity to capitalize on this discrepancy.
When we are looking at a company and analyzing whether or not to invest, we aren't really looking directly at the stock price. We are looking for value, we are trying to value the stock compared to competitors looking at the potential growth for the sector and how much market share the company commands. We look at the valuation, look at the price ratios to see if it is trading at a premium or a discount, and if that premium/discount is representative of the underlying business.
When we take a look at PayPal (PYPL) we see a large and profitable business in the rapidly growing fin-tech space. PayPal has double-digit quarterly revenue growth going all the way back to 2015 and in 2021 they are on track to increase earnings by 71%. The price of the stock is down to $193 a share down from its 52 week high of $310. The reason is there is growing competition from Shopify who has its own payment processing system called “Shop”. It didn't help that they missed their revenue mark by .83% and issued softer guidance for the end of the year. Shopify does appear to be effectively shaving market share from PayPal as well as Square with their major acquisition with Affirm.
However, PayPal is no slouch when it comes to making smart acquisitions and just announced their deal with Amazon to allow customers to pay using Venmo, a PayPal owned service. At the pace the sector as a whole is rising we are not concerned with PayPal’s long-term success. This is why in our Tactical Model we own PayPal, but also Square and Shopify because we believe in all three long term.
Lastly, if you choose to add PayPal to your holdings remember that when a stock has this much negative momentum it can be a while before sentiment turns around. You would have to go all the way back to June of last year to purchase shares at this price. The last time PayPal was trading at this cheap of a multiple was in 2019 when earnings-per-share was $2.13 and now EPS is at 4.16. The short-term prospects could remain negative for the stock price. We always want to look for quality companies that are trading at discounts and find value whether that's PayPal or any other company.
Financial Scorecard
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Disclaimer: Crosby Advisory is a registered investment advisor in the state of Ohio and Florida. Do not purchase stocks or securities based solely on this newsletter. Investments mentioned in this newsletter may not be suitable for all people. Employees of Crosby Advisory Group may own investments mentioned in this newsletter. Investing involves risk including the potential loss of principal. Insurance products are sold and serviced through our agency, NMD Insurance, which has offices in Willoughby and Ashland Ohio.
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