PayPal Stock: Time To Buy

| About: PayPal Holdings, (PYPL)

Summary

PayPal reported a solid Q4 as the payments company makes progress in the split from eBay.

The company offers a compelling valuation considering the fast growth rate.

Despite the recent rally, the stock still offers a relative bargain.

When reviewing the results of PayPal (NASDAQ:PYPL) in comparison to MasterCard (NYSE:MA) and Visa (NYSE:V), one will find it difficult to understand the valuation scenario. The small, faster-growing payments provider actually has the cheaper valuation of the group.

The company split from eBay (NASDAQ:EBAY) going on seven months now, but the stock price has traded mostly down from the split level. The Q4 results though suggest the future trajectory of the stock might finally change for the good. The stock recently bounced off $31 for the second time in the last few months.

Value Proposition

The strange part of the situation is that both MasterCard and Visa are seeing slowing growth. The market views both payment networks in the lens of a global economy switching from paper money to plastic and digital transactions. The valuations are stretched, especially in the case of Visa that will take a margin hit from acquiring Visa Europe.

While the market is hot for MasterCard and Visa with a willingness to pay multiples of up to 2x growth rates, the market is rewarding the faster growth rate of PayPal in a tepid manner. Considering the latter grew Q4 non-GAAP earnings by 27%, the forward PE multiple of only 20 is far below the growth rate.

The following table highlights the value proposition of PayPal in comparison to the payments giants:

Mobile And Social Future

The separation from eBay brings an inflection point on the payments provider originally tied to payment transactions on that platform. While total payments growth for Q4 was only 23%, the non-eBay merchant business grew by 36%. These numbers don't even include the impact from currency.

Possibly more important, the mobile and social portions of the business are surging. For the quarter, eBay had flat volumes.

PayPal saw mobile payments volume surge 45% to $20 billion. Mobile now accounts for roughly 25% of total payment volumes (TPV). The social platform, Venmo, surged 174% to a TPV of $2.5 billion.

Part of the surging volume is due to deeper engagement from existing customers. On average, customers processed three more transactions in Q4 over last year.

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Takeaway

The business model of PayPal isn't exactly the same as Visa or MasterCard, but no reason exists to pay an equal or premium valuation for the giants in the sector. The recommendation is to use the tepid price action in PayPal to buy the cheap stock alongside the company that launched a $2 billion stock buyback.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in PYPL over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.