We've based our INCOME strategy at HX Income on the same principles as our TRADING strategy at HX Trader.

Both focus on identifying "winning" companies with good stock performance and buying them when the stocks stumble.

The strategies use the same type of raw material, but the opportunities we choose differ slightly.

Remember that we simply need the stock not to go down further for our INCOME strategy. This leads us to focus on more prominent companies with more liquid stocks.

It also means that we are likely to take advantage of opportunities that are "close" to our triggers but not always through all of them.

This week’s HX Income idea is one of those types of opportunities.

Here is the idea…

The company is digital and mobile payments leader PayPal Holdings Inc (NASDAQ: PYPL).

You have likely used their services, which include PayPal, Braintree, and Venmo. The company was founded in 1998 by a team including (now famous) entrepreneur Peter Thiel. It further cemented its place in technology history by acquiring Elon Musk's online financial services venture called X.com. (That name ring a bell again now?)

After going public in 2002, it was quickly purchased by online auction company eBay Inc. (NASDAQ: EBAY) and eventually spun out as a publicly traded company again in 2015.

The company is a pioneer in the online payments industry and continues to be in a leading position.

The stock price has been a roller coaster ride in recent years. Here is the chart of the stock price over the last ten years…

As the company ramped up operations and earnings, the stock performed well from 2015 to the COVID market's top in 2021. Over that time, it went from $35 per share to over $300 per share, or an almost ten-fold increase.

However, in the post-COVID "technology hangover" period, earnings stumbled, and the stock price was crushed. It fell back to levels where it had been half a decade earlier.

As earnings results have stabilized, however, the stock price has recovered and has been strong over the last year. Here is the chart of the stock price over that period…

At its recent high of almost $95, the stock had nearly doubled from its August low.

As we reference in the discussion above, the stock price movement has been driven by growth in their earnings.

This table shows their earnings per share or "EPS" over the last decade…

Looking at the progression of EPS, you can understand the stock price history. The stock soared as earnings tripled into the COVID period. Then, the stock suffered as earnings paused.

The recent return to growth for EPS has led to an improvement in the stock price and established a strong near-term trend.

This momentum can also be seen in their earnings reports.

Their quarterly EPS numbers can be a bit “noisy,” so we look at our preferred measure of cash flow – the "EBITDA" (Earnings Before Interest, Tax, Depreciation, and Amortization).

Here is a table showing how their reported results have compared to analysts’ expectations…

Over the last few years, the company has had a good track record of beating analyst estimates. This also helps explain the recent strength in the stock price.

When companies beat numbers, analysts have to take their estimates higher. These are called "earnings revisions," when they are positive (numbers going higher), they almost always lift the stock price.

Here is a chart showing the estimates for 2025 EBITDA for PYPL (green line) along with the stock price (black line) over the last couple of years…

These numbers HAD been going lower but bottomed out last August. This was precisely when the stock price began to recover. As we discussed, the correlation between the share price and earnings revisions is very high.

Look at the end of the chart, though, and you can see that the stock has been hit hard this week.

Here is the short-term chart along with our key tactical technical indicator – the relative strength index or “RSI” …

What happened?

The company reported on Tuesday, February 4, and posted strong results. Revenue came in at $8.37 billion versus estimates of $8.27 billion, and EPS was $1.19 compared to expectations of $1.13.

They also raised guidance. The forecast for 2025 transaction margin dollars was raised to a mid-point of $15.3 billion versus the estimate of $15.05 billion. They also raise the midpoint of the EPS guidance to $5.03 versus the estimates of $4.91.

The issue for the stock was that they decided to no longer give revenue guidance more than one quarter forward. Historically, their business has been volatile quarter by quarter, although it has done well over time.

They have been undertaking repricing initiatives at their Braintree subsidiary. This has improved margins (and profitability) but created “noise” on the revenue side.

Given the recent rise in the shares (+60% in six months), the shares were vulnerable to a correction. This is precisely what happened with this revenue situation.

We have seen situations like this before where a company makes the right moves from a profit perspective but injects volatility into the top line. They almost always work out well when the company has the right momentum.

We think PYPL is in this type of situation and an opportunity to produce some nice income from this payments pioneer!