3 Reasons To Love PayPal Today

Summary

• PayPal stock has been underwater in recent months.
• Short-term headwinds have governed PayPal's share price movement as of late. But I still like the long-term trajectory of this fintech behemoth.
• Simple and sweet, let's examine three reasons to buy PayPal shares today.

SylvieBouchard/iStock Editorial via Getty Images

Let's get started

PayPal (NASDAQ:PYPL) shares have been on a roller coaster ride since peaking in July 2021 above $300/share. After dipping below $100 in early March, shares of the fintech giant have rebounded to $115. Still, PayPal is down 56% in the past six months, urging many investors to jump on the lucrative buying opportunity. The correction started in response to noise of interest rate hikes by the Federal Reserve. More recently, concerns surrounding the Russia-Ukraine crisis and less-than-ideal forward guidance provided by management during its latest earnings announcement have evoked additional turbulence.

The recent pullback is merely a short-term hiccup, and I'm still confident in PayPal's long-term flight path. As it stands today, PayPal is one of the world's leading fintech companies and will continue to benefit as the war on cash gains more momentum. Investors with lengthy time horizons should consider buying the company's stock today. The upside is clear, and provided the major drop-off, PayPal now carries a favorable risk-reward ratio. Let us now move to three reasons why investors should seriously consider adding PayPal to their portfolios right now.

1. PayPal has a solid fintech moat

In an industry becoming increasingly crowded, PayPal's moat is quite impressive. The company boasts a 50% global share of the payment processing software market, with Stripe and Shopify Pay Installments (NYSE:SHOP) acting as distant runners-up. The company's total payment volume (TPV) eclipsed $1 trillion for the first time ever in 2021, serving as a major milestone that should help propel PayPal forward in the coming years.

Flaunting 426 million active accounts, PayPal's user base amounts to nearly one-third of North America and Europe's population combined. The company continues to expand its network as well - PayPal added 9.8 million net new active accounts in the fourth quarter of 2021. Looking ahead, management expects to gain up to 20 million active users in 2022. While this only implies 5% growth year over year, it's still spectacular to see PayPal adding users given the colossal size of the company. The numbers speak for themselves whether you like using PayPal or not. New competition could certainly disrupt the company's market share moving forward, but PayPal has solidified itself as an industry leader.

2. Fundamentals align nicely with the valuation

Investors should look to exploit opportunities where fundamentally sound companies are trading at historically low valuations. PayPal embodies this idea today - the company's financials remain strong despite its collapse in valuation. This past year, PayPal's top-line and bottom-line grew 18% and 19%, up to $25.4 billion and $4.60, respectively. Recent guidance disappointed investors, but it was blown out of proportion, in my view. Management is still forecasting revenue and TPV growth as high as 17% and 23% in 2022 - this is very good for a well-established company. The first half of this year might be a bumpy ride as PayPal adjusts to eBay's (EBAY) transition to its own payments platform. Management expects eBay-related challenges to place up to $600 billion of pressure on its top-line in 2022. This isn't ideal, but it surely won't last forever. Dan Schulman, the company's CEO, stated that PayPal intends to stop adjusting for eBay in the second half of the year. We should interpret this as great news given that PayPal's ex-eBay revenue growth has been consistently above 20%.

PayPal's balance sheet and cash flow generation are superb as well. With a cash position of $5.2 billion and a debt-to-equity ratio of only 45%, the company is well-positioned to ride out any storm. PayPal seems to enjoy generating cash - the company's five-year free cash flow CAGR is 17%. In the final quarter of 2021, PayPal grew free cash flow and cash from operations by 38% and 31%, respectively, up to $1.6 billion and $1.8 billion. Investors should be pleased; PayPal is really settling in as a cash generating machine.

The company's valuation has moved non-parallel to its robust fundamentals. Today, PayPal trades at 34 times earnings, more than 1.5 times lower than its five-year average of 55. And when you compare PayPal's P/E multiple to that of close competitors like Block (NYSE:SQ), Visa (NYSE:V), and Mastercard (NYSE:MA), the company is peddling at a bargain.

Seeking Alpha Data, Author's Material

At a target P/E multiple of 35 (which is below PayPal's five-year average and industry peers) and a 2022 EPS estimate of $4.70, my twelve-month price target for PayPal is $161/share, offering 42% upside. This is quite the upside for one year, which demonstrates just how undervalued PayPal is today.

3. The company is expanding

Fortunately for PayPal, the company sits at the center of a massive secular growth industry. Management values its total addressable market at a whopping $110 trillion, a truly remarkable number. And while PayPal has its core business in place, the company is branching out into a lot of different areas. Venmo, which is PayPal's C2C mobile payment service, processed $230 billion in total payment volume in 2021, up 44% year over year. As a result of its recent partnership with Amazon, customers will be allowed to pay with Venmo at checkout starting sometime this year.

PayPal is also excited about its Buy Now, Pay Later (BNPL) service offering, which allows consumers to pay for items in interest-free installments over a specific time period. Buy Now, Pay Later is currently available in eight markets and is growing rapidly. Total payment volume for BNPL surpassed $3.2 billion in the fourth quarter, translating to 325% growth year over year. The company acquired Paidy in 2021, which now exposes PayPal's BNPL offering to Japan - one of the world's fastest growing e-commerce countries.

Would PayPal really be a fintech if we didn't touch on cryptocurrency? The company allows Venmo users to buy, sell, and hold crypto on the payment platform and continues to explore new ways to integrate crypto into its product offerings. PayPal provides investors with the best of both worlds. On one end, it's a well-established company with consistently strong fundamentals. On the other end, the company is constantly searching for new opportunities to grow its operations.

PayPal is a firm buy today

PayPal is one of my favorite stocks right now, and I think it's a no-brainer for investors with long time horizons. Short-term headwinds could continue exerting downward pressure on PayPal shares, but I'm personally not worried. PayPal is a tremendous company that has cemented itself as one of fintech's top dogs. The latest fallback has eliminated a good deal of downside associated with PayPal stock, leaving investors with an advantageous investment scenario. I'm assigning a buy rating to PayPal today - it's time to ignore the short-term noise and dial in on the fundamentals.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of PYPL either through stock ownership, options, or other derivatives. 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.

Comments

[VPTD]

The one thing i don't understand about Paypal is their moat. Everybody mentions a moat. But what it is exactly? Moat is their size? Can they provide dramatically cheaper service than competition due to their size?

I want to like Paypal, but for me it is looking increasingly like legacy tool. A lot of old integrations, a lot of users. However all of this comes from the past years.
I checked out couple lately popular ebanking/ewallet apps and they are doing basically the same thing as PayPal.

Back in the day when bank transaction or credit card were the only tools, PayPal was really interesting. Now i see 10 different payment choices and Paypal is just one of them.

Long PYPL, with some regrets.

[Maschuette]

I've been watching this stock to see if or when i should jump in. Here is my 2 cents:

Before covid this stock was trading around $100 and making $.80 a quarter. During covid the stock shot up to $300 and was making $1.20/quarter. Now they are estimating $.80 a cents a quarter and the stock is trading at $100 bucks again. Future estimations are $1.2/quarter afterwards.

Based on past earnings you could argue that the stock should jump back up to $300 but i don't think anyone would make that argument. The real concern is that this stock's earnings peaked quickly and didn't jump up much even though it should have increased a bunch based on what was going on with society. Everyone thought they were going to kill it and they didn't. Why? Because they already own the space and cant grow much more. Without growth, this stock is still overpriced at $100.

[oXXo]

@Maschuette It actually reached $123 on 14 Feb 2020 just before covid crash. Paypal profit increased during covid as online payments and spendings increased.

[Maschuette]

@oXXo so what do you expect the price to do?

[declanfromtrinidad]

So let me make something perfectly clear @paypal the Ukrainian Legion are NOT mercenaries! We are not buying ammo or guns, the Legion supplies all that. We are buying protect/support equipment: a dedicated ambulance vehicle, gas, food, plane tix for guys to Poland,etc
@AskPayPal………paypal not releasing monies…from the dirtydozen helping in Ukraine…. @RipRawlings

[bazooooka]

Enjoyed the two weeks this one was in double digits

[Paper_stax]

I recently started selling puts in PYPL as a way to get in at a lower price and make a few dollars once my strike is breached. I don't have much to add to the comments as well as the article but I'd like to mention that as society gets further away from physical currency and more towards digital payment methods, PYPL has a bright future in this cashless world.

[dgiinvestor]

34x P/E. I would take a bite at half that. Yes, I know that's a $50-60 handle. If it never gets there, it's ok.

Best wishes for all.

[canyon]

@dgiinvestor
P/E means nothing without accounting for Growth. PEG matters.

[Seeburto]

@canyon Yes ,but PE provides a tether ( a peg if you will) to reality. Growth is always an estimate,and analysts, the market, and management can be wrong, so PEG is inherently tenuous. Both are needed to estimate risks.

[obiwan48]

I originally acquired PYPL shares from its spin from EBAY.
Shares were about $30. I also at the time, took a substantial long position in call ( leap) options because as an investor and swing trader for over 50 years I felt that PYPl had a big future.
Later, after about a triple, although I had intended to keep a core position, my swing trading side emerged when one of the several serious economic crisis started rearing its head, and coupled with another buy idea I sold all shares at a healthy profit.
The Blessing and Curse of a swing trader in various markets. LOL.

Unfortunately, I missed the move to 300, but in reality it would be doubtful that I would have held a full position to that point.
In recent weeks, I’ve been buying PYPL steadily under 118.
There was some old technicals pointing to a support at $92 and it indeed hit there and then worked up from there.
My worse case price support is $72, however, doubtful it gets there unless there is a strong downdraft in the market.
Which is certainly possible under the developing major macroeconomic
shift and geopolitical crisis.

Bottom line is I feel the authors thesis makes a lot of sense.
I plan to continue to add PYPL shares and call options at various price points between 92-108 with the idea that long options will be used as a trade and shares bought now will be a core holding.
However, if some major positive developments should occur, I would quickly move to add shares at anything around 120.
But that’s not the case now and I expect a very volatile, potentially dangerous, and choppy market to continue longer than most folks think.

I’m also writing a spread of OTM covered call options for PYPL spread out over the next 9 months, because of current market conditions.
Wrote some $150 calls yesterday to create about a 6.5% yield
until year end.
While good arguments can be made about choosing other Fintech ( i.e. (PYPL vs SQ, etc, ), I feel the authors thesis is sound and offers good advice. GLTA

Long PYPL shares and Jan. 24 call options.

[jesjessie]

@obiwan48 i do not think human habits change quickly unless ones hand is forced , i've been surprised to see Paypal drop so much , personally i think the move has been over done as many companies will continue to use Paypal going forward as thats what they have adapted to during the covid crises

[Technology Assessment Group]

@jesjessie My experience is that it will take a long time to get traction by the new FinTechs. Sure, some young people will adapt some of the new payments systems...but they are young and don't know how much more robust a financial systems has to be. I've seen some of these small FinTech really screw up....and literally lose track of money. Retired financial systems guy here.

[jesjessie]

@Technology Assessment Group decided to step out seem to be to many headwinds in the markets also we will be going in to May soon

[Alpwolf]

PayPal paid around four Billion for Honey which is not mentioned
The upgrades on the platform are very attractive and are another
Building Block for PayPal.
In the age of the Internet Commerce the price paid might have been a bargain