Where Will PayPal Stock Be In 10 Years? Targeting Nearly 3x Upside
Summary
- PayPal has fallen 40% from highs and delivered negative returns in 2021.
- The stock used to be expensive: now, it is a compelling investment.
- I expect the company's ambitions in the buy now, pay later space to help strengthen its checkout network.
- I rate shares a buy with 265% upside over the next decade.
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PayPal (NASDAQ:PYPL) was a surprisingly disappointing stock in 2021, as the company saw its growth rates decelerate rapidly as it lapped pandemic comparables. While the previous stock prices were indeed rich when taking into account such deceleration, the current stock price is one worthy of investor attention. PYPL offers a potentially low-risk investment in the ongoing growth of e-commerce. PYPL's ventures into the buy now, pay later segment may further strengthen its checkout network. I rate shares a buy with 15% potential annual returns over the next decade.
PayPal Stock Price
After many years of torrid stock price performance, PYPL plummeted 40% from 2021's highs and ended up with a considerable decline for the whole year.
Now trading around $190 per share, the stock has finally re-rated to a level which skews positively to the upside.
Can PayPal Stock Continue To Grow?
Much of the stock price decline had to do with a steep deceleration in expected growth rates. PYPL guided for the next quarter to see revenue growth of only 14% at the high end and earnings growth of only 3.7%. Yet I still make the case that the long-term growth thesis is intact, as I expect operating leverage to lead to strong bottom line growth in the future.
PYPL saw continued strength in total payment volume, which grew at a 26% clip and 31% when excluding eBay.
The hidden treasure in Venmo grew at an even faster pace at 36%. PYPL was also able to grow its active accounts by a robust rate even on top of tough pandemic comparables.
(Investor Presentation)
These led to solid top line growth of 13%, or 25% growth excluding eBay.
(Investor Presentation)
Looking forward, I expect PYPL to continue its solid growth rates for a long time, as each newer generation has greater inclination to use digital financial services. That should enable PYPL's core business to continue generating solid cash flow at an increasing rate, while providing excess cash to invest in other growth areas. One of these key growth areas may be their buy now pay later offerings ('BNPL'), as nearly a million merchants are already using PYPL's BNPL solutions.
(Investor Presentation)
PYPL has invested deeply in its BNPL capabilities as seen not only from their in-house solutions, but also their $2.7 billion acquisition of Paidy, which gave them entrance to Japan's e-commerce market.
(Investor Presentation)
It is possible that PYPL might not benefit from BNPL as much as pure-play BNPL providers due to potential cannibalism from customers who were already using the "normal" PayPal checkout services. Yet that does not mean that BNPL is not important for PYPL - instead, I expect BNPL to help increase the strength of PYPL's network. In my view, one key reason why PYPL has been so successful is the convenience of checkout: with just one login, customers can use pre-filled address and billing information across all merchants. By adding BNPL solutions to this network, PYPL reduces the risk of its customers using a different network.
I expect Venmo to become an increasingly important part of the story. PYPL has already announced that Venmo will be available to use at checkout on Amazon.
(Investor Presentation)
That is one example of how PYPL will earn revenues from Venmo, which thus far seems under-monetized. Many investors have stated that buying PYPL today is like buying the core business at 40x earnings while getting Venmo for free. I expect Venmo to help PYPL sustain above-market growth rates over the next decade.
Where Will PayPal Stock Be In 10 Years?
Wall Street appears to agree, as they are forecasting near 20% compounded growth in earnings over the next decade:
I note that these projections seem reasonable if not conservative considering that they do not seem to account for as much operating leverage as I would have expected.
(Seeking Alpha)
To put it in concrete numbers, PYPL is currently earning a 21% net margin - Wall Street consensus estimates call for the net margin to expand to 30% in a decade. Considering that PYPL is a middleman for e-commerce transactions, I expect net margins to end up at 40% if not much higher over the long term. I calculate my projected 10-year stock price next.
Is PayPal A Good Long-Term Investment?
PYPL has fallen 22% since I rated the stock neutral due to valuation. At recent prices, the valuation is looking compelling. As of recent prices, shares trade at around 40x earnings with 20% projected growth over the next decade. That represents a 2x price to earnings growth ratio ('PEG') which could be considered rich but there's reason to view it as reasonable if not conservative.
To start, PYPL is already generating ample free cash flow with 21% free cash flow margins.
(Investor Presentation)
PYPL has been a willing buyer of its own shares, and I expect share repurchases to play an increasingly important role in its capital allocation strategy if the stock price remains as low as it is.
(Investor Presentation)
PYPL has a strong balance sheet with $12 billion of net cash, and this is a business which probably could support leverage of at least 1.5x debt to EBITDA, representing a potential tail-end catalyst.
PYPL is a growth story with a long growth runway - its ability to sustain elevated growth rates for a longer than usual period of time warrant the higher multiple. PYPL might not look clearly cheap based on today's multiples, but it is trading at only 7.4x 2030 earnings estimates. If its PEG ratio compresses from the current 2.2x to 1.5x, then PYPL might trade at 27x earnings in 2030, representing a stock price of nearly $700, 265% upside over the next nine years, for a compounded return of over 15%. For a stock with the lower risk profile of PYPL, that kind of potential return is attractive. That said, a big risk is if PYPL's network loses relevance, perhaps due to competing networks such as that from Shopify (SHOP). Buying PYPL at these prices is based on the stock being a lower risk investment, and this thesis falls apart if that is not true. I would want 20-25% potential annual returns if PYPL's network loses its luster, which would imply potential downside of around 50% from current levels. Because I am of the opinion that the PYPL network is in full health, I rate shares a buy, but I would be a quick seller if weakness emerges, or if perhaps I personally stop using PayPal checkout.
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This article was written by
Julian Lin is a financial analyst. He finds undervalued companies with secular growth that appreciate over time. His approach is to look for companies with strong balance sheets and management teams in sectors with long growth runways.
Julian is the leader of the investing group Best Of Breed Growth Stocks where he only shares positions in stocks which have a large probability of delivering large alpha relative to the S&P 500. He also combines growth-oriented principles with strict valuation hurdles to add an additional layer to the conventional margin of safety. Features include: exclusive access to Julian's highest conviction picks, full stock research reports, real-time trade alerts, macro market analysis, individual industry reports, a filtered watchlist, and community chat with access to Julian 24/7. Learn more.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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Years 2022-2023 are the basis for investing at this time.
Larry
