It’s important that Premium members of understand why I use revenue over EPS, and that EPS is easier for corporations to manipulate than earnings.

God bless Zacks. I don’t mean to be a jerk to the folks over at Zacks but share buybacks ruined their proprietary EPS forecast charts IMO.

I want to make sure that you guys don’t fall for EPS growth metrics and charts.

Please make sure you understand how EPS growth is manipulated by share buybacks which are at all-time record highs. That’s really an understatement. Share buybacks have become so bad that corporate employee wage growth has stagnated and CAPEX spending is lethargic. Think about the manipulation scheme for a moment. A company can do a reverse stock split to lower price and increase shares outstanding, and then spend the next decade buying back their own stock to push it back up again and to reduce shares outstanding. Then they just reverse split the stock again and keep the scheme going. The corporate officers make a bunch but their employees, consumers, and public investors ultimately suffer. I don’t think the original fathers of Wall Street envisioned capital market funding to work that way. In fact, up to about 30 years ago, share buybacks were illegal to avoid just this type of scheme from taking place.

So what does PayPal’s earnings report today have to do with any of this?

PayPal reported better-than-expected second quarter profit on Wednesday, but shares fell in after-hours trading after the company lowered its full-year revenue outlook.

For the second quarter, PayPal posted net income of $823 million, or 69 cents a share, up from $526 million, or 44 cents a share, a year earlier. But the company lowered its revenue forecast and that caused the stock to sell off.

PayPal’s earnings report today is a great example of why you shouldn’t be following EPS growth. Revenue trumps earnings per share growth as PayPal spectacularly demonstrated today. This seems to suggest that smart money is well aware of the manipulative effects of share buybacks on EPS growth and so they are putting more weighting on future revenue growth. If smart money is trading like this then you should be too. You don’t want to get caught on the wrong side of the trade because you were the dummy looking at EPS growth while smart money was primarily focused on revenue growth.

PayPal may not be representative of the market as a whole but it’s something that is worth keeping your eyes on.

PayPal stock looks fabulous but the company has engaged in massive share buybacks over the years effectively manipulating their EPS higher.

The company trades at a P/E of 61 and a Forward P/E of 44. That’s horrible folks. Worse, the company is currently valued at $144 billion but it’s doing about $15.9 billion in sales per year. In other words, the company is about 900% overvalued relative to its annual sales. The company should be trading for around $14 per share with its 1.2 billion shares outstanding.

Folks, anything you want to buy in this market, especially in tech, you are likely going to have to hold your nose and buy the overvalued stock. But the real danger is when the stock market corrects.

In Q4 2018, when the stock market corrected, PayPal stock fell from around $93 a share to $77 a share in about 2 weeks. Why? Because it was overvalued. Stocks do not represent value at their current lofty valuations and so when the market corrects, everyone jumps out and there’s no one willing to step in and buy because the stock is so overvalued. The only way you get value today is by dumpster diving and going through the trash that others have thrown out.