Shares of PayPal (NASDAQ:PYPL) have slid more than 50 percent YTD and nearly 65 percent over the last 12 months.
The digital payment processing giant, once a favorite of growth investors seeking rapid gains, has clearly encountered its first set of serious challenges in an increasingly volatile stock market.
The question, though, is whether the steep decline in share price makes PayPal a good buy for the future.
Why Have Investors Soured on PayPal?
The simplest explanation for decreasing investor sentiment toward PayPal is the fact that the company’s growth has slowed dramatically coming off of the COVID-19 pandemic.
In Q1, the company reported revenue of $6.5 billion for a year-over-year growth rate of 7 percent. Earnings on a non-GAAP basis came in at $0.88, down from $1.22 in 2021.
As with many other tech companies, PayPal has simply been unable to maintain the meteoric growth it experienced as a result of pandemic disruptions.
Changes in the business climate have also weighed heavily on PayPal this year. The Russian invasion of Ukraine in February caused PayPal to halt service in Russia. The company is also losing eBay as a source of revenue, ending the longstanding relationship between the two businesses.
A final reason for PayPal’s dramatic slide is the company’s susceptibility to inflation. Rising inflation depresses consumer spending, translating to reduced revenues for payment processors. With inflation advancing to 8.5 percent in March, it’s clear that rising prices will be a significant factor in consumers’ spending decisions for some time to come.
PayPal’s Potential Going Forward
Despite waning investor sentiment and sharply falling share prices, there’s still a lot to like about PayPal.
To begin with, the Q1 results actually represented minor beats against the company’s prior forecasts. PayPal had expected earnings of $0.87 per share and a growth rate of 6 percent. In this light, the company’s Q1 report was actually somewhat positive. Due to this fact, shares of PayPal rose 12 percent the day following the earnings report.
Although PayPal is losing eBay, it is also planning an integration with Amazon. Needless to say, this would give the company a much larger source of future revenue that could more than replace eBay. This could take some time, but the partnership would be massively beneficial to PayPal’s business going forward.
PayPal is also expanding its services beyond payment processing. The company’s newest app offers personal finance services like high-interest savings and bill payment options. More expansive finance features like these should drive future growth for PayPal as more and more of the world’s financial infrastructure goes digital.
Finally, it’s important to consider the growth of the digital payment market itself. The global market for digital payments is expected to reach $12.5 trillion by 2027, growing at a rate of about 11 percent annually. As one of the most established payment processors, PayPal stands to be a prime beneficiary of this growth trend.
Is PayPal Undervalued Right Now?
PayPal’s valuation is a bit of a mixed bag at the moment.
The company’s price-to-book ratio stands at 5.1, higher than the industry average of 3.7. Other metrics, however, are more favorable. Price-to-cash-flow, for instance, is 18.6 against an average of 31.8. Price-to-sales is also a bit below the average of 5.1 at 4.1.
The most important metric for PayPal at the moment, however, is its P/E ratio, which stands at a historically low 22.7.
Prior to the pandemic, PayPal routinely traded at multiples of 40-50. During the pandemic itself, the multiple briefly approached 80. So, by the past standards of the stock, PayPal is currently priced quite reasonably.
PayPal Price Targets
Analyst price forecasts offer a fairly rosy picture for PayPal in the coming 12 months. The median target price from 43 outstanding forecasts is $120, a gain of 31.1 percent against the current price of $91.53.
It’s also worth noting that 34 out of 51 polled analysts rate PayPal as a buy, and no analysts put forward a Sell rating.
These facts point to a bullish analyst outlook for PayPal over the next year.
Is PayPal a Buy?
Taking a broader look at PayPal’s business, growth and price forecasts, the stock appears to be a good buy at the moment. With a potential upside exceeding 30 percent and a consensus buy rating from analysts, PayPal is likely to regain much of its lost ground later in 2022.
Although growth was lackluster in Q1, it’s important to remember that Q1 2021 represented the best revenue growth report in the company’s history. Being able to grow beyond its own projections is a very positive indicator for the company going forward.
Over the longer term, expansion into personal finance services will also help PayPal improve its customer engagement and generate revenue from new sources. Eventual integration with Amazon would be a huge boon for the company, though that may take some time to materialize.
It’s also worth noting that most of PayPal’s headwinds are transient. Geopolitical tensions, inflation and even the loss of business from eBay are all issues that will resolve themselves with time. The growth of digital payments, on the other hand, will be a long-term phenomenon that should continue propelling PayPal to new heights.
A final factor to take into account is PayPal’s valuation. Although not strictly undervalued, the company is trading at a much lower P/E multiple than it historically has. Given the potential PayPal still has for future growth, PayPal appears to be what Warren Buffett has positively referred to as a “wonderful company at a fair price.”
Overall, the positives for PayPal far outweigh the negatives. The company isn’t without its risks, but it’s also trading at a discount that makes those risks well worth taking. Barring further slowdowns in growth or unforeseen headwinds going forward, PayPal appears to be a good long-term stock to buy and hold.
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