Is PayPal a Good Stock to Buy?

With over 40 percent market share in the global payment services space, PayPal (NASDAQ:PYPL) is an undisputed behemoth in the world of online payment processing.

Following a turbulent time for financial technology stocks, PayPal may be an underrated value buy in today’s market. So, is Paypal a good stock to buy?

Payment Volume Up, Earnings Set To Rise

In Q1, PayPal reported $7.04 billion in revenues, up 9 percent from the previous year. Total payment volume was up 10 percent, reaching $354.5 billion.

Total earnings over the past 12 months have been $3.87 per share. Over the next 12 months, analysts expect earnings to rise by over 17 percent.

Even better for investors is the fact that PayPal is expected to continue this growth rate over the next 3-5 years. As such, the company could be in for a very favorable period of moderate, sustained growth.

With steadily increasing revenues and earnings, investors will likely see their shares trend steadily higher over the next several years.

PayPal also maintains a hefty cash reserve of $7.1 billion. While that number is down from $7.8 billion in the previous quarter, this reserve is still more than enough for PayPal to fund its operations.

Analysts Ratings on PayPal

Analyst price forecasts for PayPal are far from uniform, but the median target price from 39 standing forecasts is $86. This would give PayPal a 12-month upside of 17.6 percent, based on the most recent price of $73.38. PayPal also has a consensus rating of buy and does not have any standing ratings below hold.

Many of PayPal’s metrics suggest that it is undervalued. First among these is its price-to-earnings-growth ratio, which is 0.84. The stock also trades at 16.9 times forward earnings, well below the S&P 500 average.

Taking these factors and PayPal’s potential for sustained growth into account, there is a reasonable claim to be made that the stock is fundamentally undervalued at today’s prices.

It’s also worth noting that PayPal is now trading well below its recent P/E ratio range. The stock’s trailing 12-month P/E ratio is currently 30.8, the lowest it has been since 2016.

While PayPal is far more mature now than it was then, the company is still growing. As such, now may be a good opportunity for investors to buy shares in PayPal while the stock trades at a discount.

Active Accounts Trend Worrying?

The most pressing risk facing PayPal appears to be its recent decline in active accounts. In Q1, the company reported a drop of 2 million accounts from the previous quarter. It should be noted, however, that the number of active accounts was still up 1 percent on a year-over-year basis. Slowing user growth could make it more difficult for PayPal to keep up with future earnings expectations.

Another concerning factor for PayPal is the company’s somewhat low net margin. At just 9.3 percent over the last 12 months, PayPal’s net margin is healthy, but far from extraordinary. The company also returns just 5 percent on its assets. It should be noted, though, that PayPal’s return on equity is substantially higher at over 19 percent.

Finally, PayPal could face long-term competition in payment processing. This concern has put downward pressure on PayPal, even after Q1’s broadly favorable earnings.

Competitive payment processors, including Apple, Venmo and Block, are all investing heavily in building products to draw merchants and consumers away from PayPal.

While PayPal has an obvious moat in the payment industry, the company will need to continue investing in new products and technologies to avoid being disrupted.

Is PayPal a Good Buy?

The bull case for PayPal appears fairly strong. With the stock trading well below its recent P/E range and priced favorably to expected growth, investors seem to be getting a fairly deep discount on PayPal shares at the moment. Despite somewhat lackluster margins, the company’s fundamentals also seem quite strong. While PayPal is maturing, it could have many more years of decently high growth ahead of it.

Another point in PayPal’s favor is its proven ability to generate large free cash flows. Over the 12 months ending in Q1, the company produced $5.1 billion in free cash flow. This large amount of free cash gives PayPal the latitude to invest in new products, pay down debt or build up its reserves for future initiatives. The free cash flow generated by PayPal is also another positive point in its value argument.

Finally, PayPal is rapidly buying back its own outstanding shares. In the past year, management has repurchased around 48 million shares at a total price of just over $4 billion. While PayPal does not pay a dividend, this repurchasing scheme is an excellent way for the company to reward shareholders using its surplus cash.

Overall, PayPal appears to be a strong potential buy for both value and growth investors. The stock appears to trade at a discount to future earnings, and the steady growth rate projected by analysts will likely continue to build the value of the company. Investors may want to take the current opportunity to add PayPal to their portfolios, as the market may correct upward and revalue the stock if future earnings reports continue to demonstrate positive growth.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.