Time to Buy The PayPal Dip?

PayPal (NASDAQ:PYPL) shareholders have had a bumpy ride this year, and most of it has been downhill with the share price sliding by 24.0% year-to-date. By comparison, the S&P 500 is up 19% for the year.

The relative underperformance of 39% in less than a year is a double-edged sword. On the one hand, any loyal shareholders have had their portfolios pummeled this year. On the other, the magnitude of the sell-off has created a potential opportunity for value-oriented investors.

Paypal Is Much More Than You Think

When the ordinary investor thinks of PayPal, what comes to mind is a button to pay at a checkout or the option to send money to someone online but what is less well-appreciated is the degree to which the company has partners with major brands and institutions.

For instance, PayPal has formed partnerships with the likes of Google, Facebook and Amazon, alliances that not only enhance its service but also open up new markets.

Equally hidden from the radar of most PayPal users is the sophisticated risk management systems and technologies that power the simply user-friendly interface, which has a domino effect to boost adoption rates.

These protections are key to managing fraud and credit risk, and in turn provide confidence to users who can trust PayPal, which in turn enables the company to grow predictably and sustainably.

PayPal fraud rate is reportedly around 0.32% of revenue, a high number no doubt, but significantly below the industry average of 1.32% for online merchants.

The company’s fraud management has helped it to penetrate the all-important small and medium-sized business sector that form a substantial part of the economy. Indeed PayPal has gone further and offers support to SMEs that enable them to grow their own revenues.

To highlight just how significant the support is, PayPal has a Working Capital program that has helped fund over 300,000 small businesses to the tune of $15 billion.

It’s probably also fair to say PayPal is much more diverse than is apparent at first glance, meaning revenues extend far beyond payment processing to include credit services via PayPal Credit and remittances following its Xoom acquisition.

The diversification of revenues isn’t limited to product categories either but spans geographies around the world, now totaling over 200+ markets and featuring 25+ currencies. 

Undoubtedly, a reason for its global success has been the company’s adoption of mobile as a primary payment channel. Indeed mobile transactions represents nearly half of all payment volumes. 

Management’s willingness to consider cryptocurrency and showing commitment to that payment avenue by acquiring Curv further highlights the company’s ability to be large but flexible and to be unwilling to fall behind the technological curve.

So what does it all mean for PayPal stock? As it turns out, there is a lot to like.

Is PayPal Stock Undervalued?

According to the consensus price target of $77.35 per share from 42 analysts, PayPal stock is undervalued by 30.0%. 

So too does a discounted cash flow forecast analysis align with that view, pegging intrinsic value of PYPL at $79.90 per share, which would translate to upside opportunity of 41.0%.

Indeed, it’s hard to argue that PayPal is anything but a deal at this time with its P/E ratio sitting at just 16.2x. Furthering the argument that the company is a bargain is its PEG ratio that stands now at just 0.23x, meaning that its price relative to future earnings growth is rock bottom.

Even a price-to-sales ratio favors PayPal at this time. It is a measly 2.1x, suggesting the company is trading at a really low premium to its top line.

It’s somewhat hard to fathom why the share price is so low given the company actually has a reasonable moat as a result of its partnerships and global reach, all of which is evident in the return on invested capital sitting at 12.3%, meaningfully eclipsing the market average.

No matter how you scrutinize the financials now, it’s a struggle to declare PayPal anything but an attractive buying opportunity. Take for instance, the return on equity of 18.8% or the $11.7 billion in gross profit. Both are staggering figures that appear to be unrewarded by the market at this time.

It’s clear analysts and a DCF analysis are joined by management in the assessment that the stock is on sale because a further $1 billion was allocated to share repurchases.

Given that revenues and EPS are all forecast to climb higher over the next few years, in conjunction with the fact that the share price has taken a tumble, it certainly seems like the opportune time to initiate a share buyback scheme.

Wrap Up

PayPal has a tremendous amount going for it, including diverse revenues, a global reach, a flexible strategy, and significant undervaluation.

It’s also got a fortress balance sheet that enjoys $6.8 billion in cash and $4.7 billion in short-term investments while long-term debt levels reside at a manageable $10.6 billion.

And then there is this nugget to be found on the financials. As far back as we could see, all the way to 2015 not a single quarter was reported that didn’t enjoy year-over-year revenue growth. So too was operating income in the black each and every quarter also.

As we explored earnings per share figures going back years, not a single quarter was reported in the red either. Clearly, management has done an exceptional job at simultaneously managing growth, costs and profitability.

When you sum it all up, you end up with a financially sound company that has experienced a strong sell-off and sharply underperformed the market this year, all of which translates to a higher margin of safety and more upside opportunity for prospective investors who are willing to buy the pullback.

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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.