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A large tranche of out-of-the-money (OTM) call options in PayPal Holdings (PYPL) stock traded today. This highlights the underlying bullish sentiment on PYPL stock. For one, the stock could benefit from higher expected revenue and free cash flow in Q4.
PYPL was at $89.70 in morning trading on Wednesday, Jan. 15, up from $77.25 on Nov. 1 (+16.1 %), just after its Q3 earnings release on Oct. 29. This is off from its recent peak of $91.30 on Dec. 16.
I discussed PYPL stock and its value in a recent Barchart article: “PayPal LEAPs (Long-Dated Calls) Look Attractive, Given PYPL Stock's Upside.”
Today, a large tranche of call options at the $94.00 strike price traded for expiration in 9 days on Jan. 24, 2025. There were over 7,600 call option contracts traded with a small premium of just 39 cents.
That premium represents just 0.43% of spot trading price, a very low yield for any short sellers of these calls. It seems more likely that a set of investors feel that PYPL stock could rise to $94.00 or higher by Jan. 24.
That is a very bullish sentiment on PYPL stock. Let's review why that might be the case.
PYPL Stock Price Targets
In my last article, I wrote that PYPL stock could be worth at least $105 per share. That was based on its strong free cash flow (FCF) margins and analysts' revenue forecasts.
For example, management has already forecasted that they expect to make $6 billion in FCF this year. That represents an 18.9% FCF margin.
Using analysts' revenue estimate for 2025 of $33.52 billion, FCF could rise to $6.34 billion:
$33.52b x 0.189 = $6.335 billion
As a result, using a 6.0% FCF yield metric (the same as multiplying FCF by 16.67x) , PayPal's market cap could rise to $105.67 billion:
$6.34b / 0.06 = $105.667 billion
That is 17.5% higher than its market cap today of $89.93 billion. In other words, PYPL stock is worth over $105 per share:
$105.67b / $89.93 b = 1.175
1.175 x $89.70 = $105.40 per share
Analysts Agree
Moreover, analysts also see the stock as undervalued. For example, Yahoo! Finance reports that 46 analysts have an average price target of $94.77 per share. Similarly, Barchart's mean target is $93.51.
In addition, AnaChart shows that 37 analysts who have written recently on PYPL stock have an average price target of $107.12 per share. My Nov. 20 GuruFocus article on PYPL showed that analysts had an average price target of $102.91. So, they have been raising their price targets since the company released its Q3 earnings.
That might imply that analysts expect to see strong Q4 revenue and FCF.
For example, Seeking Alpha reports that analysts now expect to see $8.27 billion in revenue for Q4. That would be +3.0% higher than last year's $8.026 billion Q4 and +4.88% higher than last quarter.
Moreover, Seeking Alpha reports that 20 analysts have raised their earnings per share (EPS) targets vs. 6 that have lowered their targets. In addition, Barchart's survey of analysts shows that they have raised their average buy recommendations in the last 3 months from 3.76 to 3.83 out of a high 5.0 scale.
The bottom line here is that today's options action reflects a strong bullish sentiment among investors for PYPL stock.
