PayPal Gets Irresistibly Cheap

At the start of 2021, PayPal (PYPL) traded just north of $300 per share.

Today, it’s barely holding above $100 per share.

That’s a haircut of more than 65%.

Right now, the company is worth as much as it was when it generated $15.9 billion in sales. Except it currently makes $25.3 billion.

Its recent quarterly results sent the stock tumbling nearly 40% in a matter of days as revenue growth slowed.

But does that create an investable opportunity?

Amongst financial services stock searches this month by financial pros, PayPal led the pack by a mile.

This stock has seen more interest in the last month than the last three combined.

Taken together, we wanted to know whether this created an investable opportunity for bottom fishers.

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PayPal’s Business

Back in the day, Ebay (EBAY) and PayPal worked hand in hand.

Ebay did the selling and PayPal handled the payment processing.

Today, PayPal is a standalone business that’s losing its old friend as Ebay transitions to its own payment platform.

PayPal is a payment and money management platform that allows users to transfer, transact, and trade across the globe.

Merchants can use PayPal to process payments, while users can use PayPal and related services to purchase goods and services as they would with their bank or credit card accounts.

In recent years, PayPal has expanded its business to include digital wallets, cryptocurrency trading and payments, as well as the Venmo app.

The stock’s recent decline was driven primarily by slower growth.

Toal payment volume surged during the pandemic, sending shares skyrocketing. 

However, recent growth rates slowed to 23%, with guidance for 2022 at 19%-21% with net revenue growth at 15%-17%.

That is what caught investors’ attention.

On top of that, you can see the decline in account growth as well.

The good news is the company’s Venmo mobile app is helping driving transaction growth, competing directly with the likes of Square (SQ) and other payment providers.

Financials

Let’s start with a dose of realism.

PayPal is an incredibly profitable company that isn’t going bankrupt anytime soon.

The company generates more than $5 billion in free cash flow annually and expects to get near $6 billion in 2022.

That’s more than $5 per share in free cash flow.

Now, detractors are correct in pointing out the higher expenses and declining margins over the last several quarters.

At the moment, PayPal operates at a 17% operating margin. However, the company believes it can expand that to over 20% by 2025.

Management also guided for non-GAAP EPS of $4.60-$4.75 per share, giving the current P/E a bit more than 23x.

But remember, growth is slowing, not stopping.

Lastly, we want to note the company carries $11 billion in long-term liabilities with $9.5 billion in cash on hand that was $13.3 billion the quarter before.

That gives them ample room to spend on acquisitions and development to bolster their growth.

Valuation

PayPal is best compared to other payment processors including Square, Visa (V),  and MasterCard (MA). 

So we decided to start there for our analysis.

All in all, PayPal looks pretty cheap compared to its peers.

While Visa has a slightly better forward GAAP P/E, it has a forward non-GAAP P/E of 32x compared to 24x for PayPal.

Square takes the cake on the price to sales ratio driven by its high growth.

But PayPal comes out on top for the all important price to cash flow ratio.

Turning to growth, it becomes apparent that Square is moving quickly to capture market share. Hence, its lofty valuations with the exception of P/S ratio.

Notably, PayPal has a decent 3 year compound annual growth rate for EBIT and EPS, better than Visa or Mastercard. And when we look at the growth rates for PayPal backwards and forwards, they all land right around 18%.

Our Opinion – 8/10

While PayPal could crack $100 per share, given its growth and reasonable outlook, paying 20x cash isn’t a bad proposition.

Payment processing is a big business that is set to grow with more volume shifting online.

Yes, it’s a competitive environment. But PayPal has the name recognition and global reach Square doesn’t. And simply put, it has better technology for mobile and online payments than Visa or Mastercard.