Extraordinary Buying Opportunity in Market Leader

Happy July 4th to our American readers.

PayPal has faced its fair share of difficulties but with the S&P 500 setting new all-time highs, this beaten down market leader may be on the cusp of returning to former glories.

While PayPal rode the wave of an upsurge during the pandemic lockdowns that drove contactless ordering, the return to normality has resulted in dismal share price performance, down over 80% from its highs.

Yet a turnaround in the fortunes for investors may be on the horizon, and if so now could be the time to buy PayPal.

Key Points

• Despite a significant drop in share price, recent data indicates PayPal may be on the brink of recovery.
• PayPal’s transaction volume is at an all-time high, and its network effect is strengthening as more merchants and consumers use the platform.
• PayPal’s stock is undervalued with a low price-to-earnings ratio, and the company is expected to grow earnings per share significantly over the next five years.

Why Buy PayPal

Where PayPal has continually hit a brick wall in the eyes of investors is the declining number of active accounts over a string of quarters. Finally, a turnaround occurred in Q1 and it may be just the beginning.

New users are not only joining the platform but spending more than ever, and more often than previously. The average monthly transaction volume annualized sits at 5, an all-time high for the platform. Payment volume is up by double-digits in percentage terms too.

With higher usage and more spending, the network effect strengths as merchants are incentivized to accept PayPal, which in turn leads to more consumers willing to select it as a payment option.

The data is showing that the proof is in the pudding with a 33% increase in checkout conversions when the buyer uses PayPal versus another form of payment.

There is an argument against PayPal being a stodgy former leader that is under attack from all sides by new rivals but none of them have the user figures that PayPal enjoys. And there is a real friction to customers leaving.

Is PayPal a Deal?

PayPal trades under the key price-to-earnings threshold that Warren Buffett is believed to favor of 15x. It trades at just 14 times earnings. Keep in mind that it is a highly profitable company that spits out net income and cash flows at a stable and consistent rate for years.

The top brass thinks PayPal can grow revenues in the teens on a percentage basis in the next year which should further support the bulls case.

So what can the bears cling to? For one, the lower margins on the non-branded checkout option. The lack of share price igniting in spite of the valuation case. And the threat of companies like Revolut, which continue to growth from strength to strength with powerful network effects in Europe.

Still, management has faith and is aggressively buying back shares at this price. It forecasts $5 billion in free cash flow, and management plans to repurchase even more than $5 billion in shares this year. That provides a further boost to earnings per share.

Wall Street analysts currently expect PayPal to grow its earnings per share at a compound annual rate of almost 16% over the next five years as a result of the above factors. So, with shares trading under 14x earnings, they present an incredible bargain for investors.