How Low Can PayPal Stock Go?

Is PayPal Rock Solid?

A conundrum investors have faced for a while as it pertains to PayPal is why PYPL share price is low but the fundamentals actually seem pretty solid.

For example, over the past five years, Total Payment Volume, a key indicator of the platform’s user engagement and transaction activity, has risen nicely.

Over the past few years since 2019, TPV has gone up from $712 billion in 2019 to $1.53 trillion last year. If nothing else that highlights just how much consumers and businesses are reliant on PayPal for digital transactions.

As Total Payment Volume goes, so too do revenues and and, over that same time frame, revenues are up from $17.77 billion to $29.77 billion​.

The trend continued early into 2024 with TPV up in the first quarter on a YoY basis by 14% to $403 billion. Monthly active accounts rose by 2%, although active accounts, which featured at least one transaction in the last 12 months, declined by 1% from the previous year’s period. 

Beyond the headline figures, PayPal has adopted a new non-GAAP methodology in 2024, which includes stock-based compensation expenses and related payroll taxes. As a result, PayPal’s non-GAAP earnings per share improved by 27% year-over-year to $1.08.  Under the old methodology, the increase would have been a more modest 20%.

Looking to the future, management is forecasting a slight dip in GAAP EPS from $3.84 in 2023 to approximately $3.65 in 2024 but the 2023 figure included positive impacts of about $0.24 from the sale of Happy Returns and $0.14 from other investments.

PayPal’s New Growth Driver?

Recently, PayPal unveiled a new advertising platform and the appointment of Mark Grether as SVP, General Manager of PayPal Ads.

Grether has been in the advertising industry for over 20 years. Prior to PayPal, he worked for Uber (NYSE: UBER) and under his leadership, Uber Advertising grew to a $1 billion business. Before that, he worked for the ad business of Amazon.com (NASDAQ: AMZN).

The future of PayPal’s ad business looks bright, not least because the company has a strong relationship with millions of consumers and merchants, which should support vast reach and distribution. 

Is PayPal a Buy Now?

PayPal has a great deal going for it, though you wouldn’t necessarily know that looking at the share price. For one, management clearly believes that the share price is undervalued as evidenced by the decision to pursue a share buyback.

They are not the only ones who see value in PayPal. Among 38 analysts, the consensus is that the share price can rise all the way to $76 per share.

It’s also clear on a multiples basis that PayPal has the potential to rise. It seems like it is trading at a low P/E of just 14.1x relative to future earnings growth.

Speaking of earnings over the next 5 years, the top line is forecast to grow at a pace of 8.2% annually while the bottom line is expected to grow at a CAGR of 6.0%.

The thing about PayPal that perhaps makes it most attractive of all is that it produces enormous levels of free cash flow thanks to the $11.9 billion in gross profits generated annually. Last year, a full $4.2 billion in free cash flow was generated.

All those cash flows in turn have helped the company to accumulate a massive cash hoard of $9.0 billion in liquid cash and $4.9 billion in short-term investments.

When you factor in the company’s market capitalization is just $60 billion while $13.9 billion of liquidity sits on the balance sheet you can see just how much optionality management has to innovate and grow, which it seems to be doing now with FastLane, Buy Now Pay Later, and the expansion of Credit Products.

A new CEO appears to have breathed fresh life into this old school financial technology firm and is shaking up the firm to lead it into the next era of growth. If any one of its initiatives resonates with the market place, they alone may move the needle let alone a combination of them altogether.

In short, the future looks bright for PayPal so while the lowest stock forecast among analysts is $60 per share, perhaps it might be better to ask how high can it go, and to answer that question the most optimistic forecast is $145 per share.

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