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“A Powerful Recipe for Success”: PayPal at a Discount

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Last July, PayPal (Nasdaq: PYPL) was trading for $308 per share.

Today, it’s trading at a quarter of that price – having declined a stunning 73% in less than a year.

Paypal's Share Price

With that kind of share price collapse, you would think that PayPal’s business must be struggling.

It isn’t. Not at all.

In fact, the pandemic era has been a blessing for PayPal.

COVID-19 accelerated the preexisting long-term trends that had been driving PayPal’s earnings growth for years.

The first trend I’m referring to is the growth in market share of digital payments versus cash.

The second trend I’m talking about is the rise in transactions completed virtually versus those taking place in person.

Temporary lockdowns and the desire to avoid possible COVID-19 exposure forced people to make transactions in the digital realm.

In doing so, they got more comfortable with it.

By all metrics, PayPal has taken a giant leap forward since the beginning of the pandemic.

Notably, PayPal increased its operating income by 54% from the end of 2019 to the end of 2021.

But guess what?

With the recent slide in PayPal’s shares, the stock is now trading below where it was before all of its COVID-19-era growth occurred.

PayPal’s Stock Has Never Been Cheaper

Initially, the stock market rewarded PayPal for the company’s growth success in the COVID-19 era.

PayPal’s stock price was between $80 and $90 during the COVID-19-induced crash of March 2020, early in the pandemic.

By summer 2021, the stock price had cleared $300.

My, how things have changed since then…

With the entire technology sector falling off a cliff, PayPal shares have now fallen from $300-plus clear back down to below $90.

PayPal’s stock price may be down, but the company’s earnings are up. We call this phenomenon multiple compression.

The value proposition offered by PayPal’s shares has greatly changed in our favor as investors.

For the first time ever, PayPal is now trading for less than 30 times trailing earnings.

Paypal's Price to Earnings Ratio

From 2018 through the start of 2020, PayPal traded near or above 50 times trailing earnings.

That’s 66% higher than its current valuation.

Meanwhile, analysts estimate that PayPal will earn $3.89 per share in 2022.

That means the stock is trading for around 20 times this year’s earnings.

And if we go by the analyst estimate of $4.84 for earnings per share in 2023, the stock’s valuation multiple shrinks to just 17 times earnings.

And that increase from $3.89 per share to $4.84 per share amounts to year-over-year growth of 24%.

So PayPal is still expected to post strong growth.

I believe 20 times this year’s earnings is an excellent price to pay for a company showing the following positives…

  • A windfall in the form of digital transaction acceptance
  • A pristine balance sheet
  • A likelihood of double-digit earnings growth in the years to come
  • Excellent cash flow generation
  • A huge discount.

Last summer, when PayPal was trading at 70 to 100 times earnings, its stock was a terrible buy.

Today, PayPal’s stock is reasonably priced for a company of its quality.

Quality at a reasonable price is a powerful recipe for investment success.

Good investing,

Jody

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