PayPal: Dominant and Dirt Cheap

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Boasting a 41% market share, PayPal (Nasdaq: PYPL) is the owner of the single most dominant online payment technology in the world.

However, to say that the market has given up on shares of this company would be a major understatement.

The stock’s recent collapse has been severe.

In July 2021, it peaked at just over $300. Today, the shares change hands for around $60.

Over the past five years, the stock is down a very disappointing 37%.

Chart: 5-Year Slump

Operationally, though, PayPal’s performance doesn’t look too bad to me.

While the five-year stock chart goes way down, the five-year revenue chart shows that PayPal is still growing quite nicely.

Chart: PayPal Has Shown Surprisingly Steady Revenue Growth

What stalled PayPal’s stock price wasn’t a lack of revenue growth; it was a drop in operating income.

While revenue has continued to grow, operating profits haven’t. PayPal’s operating income went from $3.3 billion in 2020…

To $4.3 billion in 2021…

Then back down to $3.8 billion in 2022.

So the company did see decent growth over that span. But the market clearly did not care for the decrease in operating income from 2021 to 2022.

When a growth company stops growing, the stock market can be ruthless in its valuation of that company’s stock.

The chart below shows how dramatically PayPal’s valuation has fallen.

Chart: PayPal's Rapidly Declining Valuation

When the stock was at its peak in 2021, investors were valuing the company at over 100 times trailing earnings.

As you can see, the market is willing to pay a steep price for companies it thinks are going to grow at a nice clip for a very long time.

The shift toward digital payments during the pandemic also got investors excited about PayPal’s stock.

There’s no doubt PayPal was overvalued when it was trading at 100 times earnings. But now that the market has soured on its future growth, the shares are valued much more attractively.

Here’s the thing, though…

I don’t think PayPal’s growth is anywhere close to being done.

The move to digital payments is still a very powerful long-term trend that the company is going to benefit from.

PayPal’s operating income increased from $2.6 billion over the first nine months of 2022 to $3.3 billion over the same period in 2023…

And for all of 2023, the average earnings per share (EPS) estimate is only $4.95.

With the share price around $58 as I write, PayPal is trading at just 11.7 times its 2023 projected earnings.

That’s the kind of valuation you would expect to see for a company that has virtually no future growth on the way.

For PayPal, that just isn’t the case.

The average EPS estimate for PayPal in 2024 is $5.50. That would be very nice 11% growth from last year’s expected EPS figure.

The longer-term analyst expectations are for PayPal to continue growing at a rate of at least 7% through 2027. And I feel quite confident that PayPal’s growth will continue far beyond then.

What all this means is that today, an investor can buy shares of PayPal at a valuation that implies no future growth ever.

But here’s the reality: This is a company that…

  • Is dominant in its market
  • Is being boosted by a massive tailwind (the digital payments megatrend)
  • Still has plenty of growth ahead of it.

The market has given up on this company, and that has created a great buying opportunity.

The Value Meter rates shares of PayPal as being “Extremely Undervalued.”

The Value Meter

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