Why PayPal Stock Is a Bargain After Its Sharp Pullback
PayPal (NASDAQ:PYPL) remains the leader of the fintech space while it continues to increase and is still quite profitable. Moreover, PYPL stock trades at bargain-basement levels and has a new, up-and-coming CEO. Additionally, I believe the Street is overly worried about threats to PayPal’s dominance.
Given all these points, growth-at-a-reasonable price (GARP) investors should buy the shares on weakness after they tumbled 23% in the last three months.
A Growing, Profitable Leader
In the second quarter, PayPal’s top line climbed a robust 7.4% versus the same period a year earlier, coming in at $7.3 billion. Moreover, its volumes and transactions increased at least 10% year-over-year, while its operating income jumped 31.5% compared to a very strong $1.1 billion a year earlier.
Meanwhile, PayPal appears to be the leader of the fintech sector, as the revenue of other top names in the industry, including Block (NYSE:SQ), SoFi (NASDAQ:SOFI), and Affirm (NASDAQ:AFRM), are well below PayPal’s sales.
For example, PayPal’s 2022 top line came in at $27.5 billion, while Block generated revenue of $17.5 billion last year.
Extremely Low Valuation and a Very Promising New CEO
The forward price-earnings ratio of PYPL stock is just ten, while its Enterprise Value/EBITDA ratio is also tiny, coming in at 11.7. Further, the company’s forward price-sales ratio is a diminutive two. The company’s high profits and rapid growth make its shares incredibly cheap.
Alex Chriss became PayPal’s CEO on Sept. 27. In Chriss’ previous role, he led Intuit’s (NASDAQ:INTU) Small Business unit, whose revenue increased at a compound annual growth rate of 23% during his tenure. Additionally, the division’s “customer base” grew at a CAGR of 20% during that time. Given these statistics, I believe that Chriss has what it takes to significantly improve PayPal’s financial results and enable it to retain its role as America’s leading fintech company.
The Street’s Overdone Concerns
On Sept. 13, investment bank MoffettNathanson cut its rating on PYPL stock to “market perform” from “outperform.” One of the key reasons for its downgrade was its belief that PayPal was coming under “fierce competitive pressure” from Apple’s (NASDAQ:AAPL) Apple Pay.
But according to research firm Merchant Machine, Apple Pay’s share of the global payments market is only 7.4%, versus 20.5% for PayPal. Therefore, even if Apple Pay is increasing, as Moffett Nathanson and others report, it won’t pose much of a threat to PayPal anytime soon. And that reality is shown by PayPal’s impressive growth in Q2.
Other reasons for the very low valuation of PYPL stock likely include worries about the outlook of e-commerce and concerns about the U.S. economy overall.
However, as I’ve argued in past columns, I expect e-commerce’s growth to reaccelerate as “revenge travel” dies down. Meanwhile, concerns about the U.S. economy are tremendously overdone, as shown by the fact that U.S. retail sales climbed a very impressive 0.7% in September versus August. Moreover, the Federal Reserve predicts that the American economy surged a very impressive 5.4% above inflation in the third quarter.
While the economy in Europe, where PayPal is also popular, is much weaker, I expect the EU’s economy to improve meaningfully in 2024, helped by lower interest rates and successful Chinese stimulus measures.
The Bottom Line on PYPL Stock
PayPal remains the fintech leader while it continues to generate impressive profits and its ridiculously low valuation. Further, concerns about its outlook are way overdone, and it has a new CEO who appears to be highly capable.
In light of these points, those long-term investors looking for a quickly growing tech stock with an attractive valuation should snap up PYPL stock.
On the publication date, Larry Ramer did not have (directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
