PayPal’s Call Options Surge, Indicating Undervaluation


Unusual call options activity surrounding PayPal Holdings (NASDAQ:PYPL) has caught attention, as reported by Barchart. This uptick is attributed to the robust Q3 earnings report, revealing significant adjusted free cash flow (FCF). With its high FCF margins, experts suggest PYPL stock may be undervalued by more than 50%, prompting the surge in call options.

Barchart’s Unusual Stock Options Activity Report on Nov. 15 highlights a noteworthy development. Over 9,000 call option contracts, priced at $60, are in play, exceeding the spot price of approximately $58 by just over $2. These options are set to expire on Dec. 29, 2023, indicating a 44-day period. The substantial trading volume, over 38 times the usual outstanding call contracts at this strike price, suggests a bullish stance among investors who are likely anticipating an upward trajectory for PYPL stock.

For the investors to see profits, the stock must reach $61.78, considering the average premium for the calls is $1.78. This implies a modest increase of $3.78 or 6.5% in the next 44 days for a breakeven scenario. The volume and strike price of these calls indicate a strong belief among buyers that PYPL stock is poised for more significant gains.

Key Driver: PayPal’s Impressive Free Cash Flow and FCF Margins

In Q3, PayPal reported $1.9 billion in adjusted FCF from $7.418 billion in revenue, resulting in an impressive adjusted FCF margin of 25.6%. This surpasses the operating margin of 15.7%, driven by a substantial 15% YoY growth in total payment volume (TPV) and an 11% increase in the total number of transactions. The $7.481 billion in revenue, up 8.36% YoY, showcases the company’s expanding market share in payments and trading.

Projections Based on FCF: PYPL Valuation Poised for Growth

Analysts foresee a revenue range of $29.6 billion to $32.2 billion for 2023, averaging around $31 billion over the next 12 months. Applying the latest FCF margin of 26%, this suggests an estimated $8 billion in FCF. Using a 7% FCF yield metric, PayPal’s market cap could potentially rise to $114 billion, an 87% increase from the current $61.1 billion market cap. Even with a conservative 10x FCF multiple, the stock could be valued at $80 billion, indicating a 31% increase from the present price. The average of these estimates, at $97 billion, implies a remarkable 58.7% growth from the current market cap.

In summary, the surge in PYPL call options aligns with analysts’ optimistic revenue projections and prudent FCF metrics, indicating a potentially undervalued stock that investors are keen to capitalize on.

Featured Image: Unsplash

Please See Disclaimer

About the author: I am a writer and an editor with experience in publishing, research, and SEO strategies. I have an honors BSc in Social Work from the University of Benin, Nigeria.