New trade: Long Paypal ($PYPL) & Short Rackspace ($RAX)

By: ispeculatornew
Date posted: 02.03.2016 (3:00 am) | Write a Comment  (0 Comments)

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Today marks my third long & short trade of the year, so far things have been going ok. To start off, all of my long & short trades are always available (for 2016 but also past years) here:

http://www.intelligentspeculator.net/livetrades

I’m opening a new trade between two stocks that face intense competition partially from the “ecosystem” plays. I strongly believe that one will perform much better at least in the short to medium term.Here is the usual chart that I look at with sales growth over the past few quarters:
***Paypal was part of eBAY until a few months ago so I did add EBAY in this chart:
PYPL_RAX_EBAY_chart (1)

I would say that both have seen comparable growth in sales but as I’ll argue below, I think that makes PYPL a much more attractive stock for a comparable valuation.

Let’s take a look at the numbers:
TickerNamePricePE RatioPE Next YearReturn YTDSales GrowthBook ValueBetaRevenue/ShareSales 5Y Avg GrowthEPS 5Y Avg Growth
PYPLPayPal Holdings Inc36.8336.0821.082.4315.2411.24N/A7.57N/AN/A
RAXRackspace Hosting Inc19.822.5421.36-18.0916.917.791.1612.6420.8330.89

$PYPLLong Paypal (PYPL)

Paypal is under intense competitive pressure from both giants like Google (GOOG) and Apple (AAPL) but also much more nimble private companies such as Stripe. Clearly, I’m worried about it’s longer term future. But payments are incredibly complex and I do think Paypal will remain the dominant player in the short to medium term. It has also made some acquisitions that at least give it a shot in the future. Growth is clearly slowing but I think it remains a good value at these levels compared to the overall market. Paypal remains the dominant option for peer-to-peer payments and does have a solid infrastructure to manage B2C business (nearly) all around the world
PYPL_RAX_EBAY_chart (2)
pypl
Next earnings: April 28th 2016

Short Rackspace (RAX)

Rackspace is a more difficult name to trade but I do remain confident that Rackspace will greatly struggle to compete with the likes of Amazon (AMZN), Microsoft (MSFT), Google (GOOG) and so many others. There is intense competition in cloud services that are resulting in significant price cuts which end up having an important impact on the stock that I expect will continue. Rackspace can certainly exist and continue to grow but I’m confident that margins will be under heavy pressure.
PYPL_RAX_EBAY_chart (4)
Next earnings: February 16th 2016
Disclaimer: This trade on PYPL-RAX will be done on today’s opening.
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