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PayPal: Not As Overvalued As Valuation Multiples Suggest

Aug. 02, 2021 1:01 PM ETPayPal Holdings, Inc. (PYPL)7 Comments
StockBros Research profile picture
StockBros Research


  • PayPal appears to be overvalued when looking at valuation multiples.
  • The company generates a lot of cash which boosts its intrinsic value.
  • We forecast future cash flows using PayPal's fundamentals.

PayPal phone
bizoo_n/iStock Editorial via Getty Images

PayPal Holdings (NASDAQ:PYPL) is a great company that may appear overvalued when looking at valuation multiples. However, it's not as bad as it may appear since the company generates a lot of cash. In this article, we will

This article was written by

StockBros Research profile picture
Two bros that talk about stocks, mainly GARP (growth at a reasonable price) stocks, but we look for opportunities everywhere. We don't have a specified time horizon. We invest in a stock for as long as our thesis holds true, and get out when the facts change. In addition, we've developed market-beating algorithms with python that help us find attractive investment opportunities within our own portfolios.Website: www.stockbrosresearch.comTwitter: @StockBrosTrades

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within 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.

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Comments (7)

TJRyan profile picture
Back to $300 that you can bet on...
PayPal expects to generate $40B+ in FCFs in 21-25 - see Investor Day Presentation - why do you come in much lower?
StockBros Research profile picture
@SeeAroundTheCorner Thanks for reading, the numbers are different because as we mentioned in our article, we subtract stock-based compensation and acquisition costs as part of the free cash flow calculation.

Stock-based comp dilutes shareholders.

In addition, acquisition costs seem to be an important part of the company's growth strategy. Therefore, it needs to be considered as capex since that money would not go to shareholders as potential buybacks or dividends.
@StockBros Research Got it - that makes sense. Also, your revenue growth forecast decelerates rapidly in the second half of the decade down to 3% exactly when I would expect earnings growth to accelerate as PYPL reaps the benefits of a wide range of investments it is currently making. If earnings growth continues at 20%, the actual valuation is much higher. The way you analyze NPV and decelerated growth - is this typical for Wall Street analysts or this mostly your style?
StockBros Research profile picture
@SeeAroundTheCorner the way we analyzed is a typical 3 stage DCF model. Since forecasting becomes more difficult the further out you go, it's simply more conservative to "transition" to the terminal growth rate.

But if you have reason to believe the company will continue to grow at 20% during that period then PayPal would be undervalued and you could use our model as a "base" or "bear" case.
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