What Paypal Teaches us About How the Stock Market Works

Boost your returns by mastering the art of decoding market cycles

What happened with Paypal is a great example of the psychology of the market in the different stages of a market cycle. More precisely, it illustrates with a great accuracy the different “phases of a bubble” chart from Jean-Paul Rodrigue.

A bit of history

PHASE 1: 2017 - 2021. The road to euphoria

During this phase, PayPal experienced rapid growth, fueling investor euphoria. Valuations reached absurd levels, with a PE above 70x. Wild narratives emerged to justify these valuations

PHASE 2: 2021 - 2023. The fall

The stock went from over $300 to just $50, a painful decline. Along the way, market sentiment shifted through every stage, from anxiety to capitulation. Early on, many analysts advocated buying at every support level. But as the decline persisted, the prevailing sentiment turned overwhelmingly bearish, with claims that the stock was "dead"

PHASE 3: 2023 - Mid 2024. Depression

Disappointed investors offloaded their shares to more patient buyers. While sentiment remained largely negative, a few optimistic voices began to emerge

PHASE 4: Mid 2024 - Now. Disbelief and hope

Despite a 40% YTD gain, skepticism among bears remains strong. Many are struggling to accept the rebound, while the first signs of hope are appearing, suggesting the start of the next phase

The phases of a bubble

This very famous chart is the theory of what happens in case of a bubble. Does anything look familiar?

Yeah that is exactly Paypal chart. A great example.

You have the same chart here but with an (approximately drawn) mean, allowing you to easily identify the “take off” at the end of 2017, the bear trap in 2020 and the despair in 2023/2024.

What can we learn from that?

First, about Paypal:

• If you remain objective, PayPal was grossly overvalued during Phases 1 and 2, and catching a falling knife proved costly for many. Of course, during these phases you never know where the top will be, but the risk/reward ratio is clearly not the best

• Phase 3 presented a compelling opportunity, with a reasonable PE ratio and solid fundamentals

• Now, the price is fair, but without a significant margin of safety. We are still in the “smart money phase” though. If the rally continues, the stock could become overvalued again, even as the market buzzes with excitement

It is very important to ignore the noise! Staying focus on business fundamentals, valuation, potential total shareholder return is very important.

And this is actually what I did and why I invested in Paypal during the despair phase as presented for my paid subscribers on my portfolio just here. Of course I didn’t catch the exact bottom, but I identified the despair phase, the fundamentals behind the noise. And this is exactly the goal of this newsletter: to give you the tolls to do the same!

So right now, ask yourself, which stocks are currently in a bubble cycle?