Got $6,000, Here Is 1 Cheap Stock To Buy Now
It’s been something of a mystery how a company generating $30 billion in revenue and spitting out $5 billion in operating income is valued at just 2x sales yet that’s precisely the case with PayPal.
Across a host of metrics, PayPal seems like a cheap stock. For example, the price-to-earnings ratio is just 14x, a smidge below the 15x line in the sand that Buffett is largely believed to favor.
And then there’s the growth. On the top line, PayPal is forecast to grow at 8.2% annually over the next 5 years while net income is expected to climb annually at a 6% pace. While these numbers aren’t going to knock your socks off, they do correlate to a PEG ratio of just 0.2, meaning PayPal is trading at rock bottom price-to-earnings ratio when future earnings growth is factored in.
That’s why if you’ve got $6,000 to spare, buying 100 shares of this fintech stock might be just the way to go. But is there a catch?
Key Points
- PayPal, with $30 billion in revenue and $5 billion in operating income, has a low valuation at 2x sales and a 14x price-to-earnings ratio.
- The FinTech leader faces slowing growth, intense competition, regulatory issues, and declining profit margins.
- Despite challenges, PayPal’s low valuation suggests it may be undervalued.
Why Is PayPal So Cheap?
It’s probably fair to say there are four reasons why PayPal is cheap now. The first is that the company’s growth rate has been slowing to the single-digits versus the double-digits to which investors had become accustomed. According to PayPal’s Q1 2024 earnings report, the company posted a revenue of $7.04 billion, up 8% from the previous year, but below the 12-15% growth range observed in earlier years.
PayPal is also subject to much greater competition than in its early days. PayPal’s active accounts grew by 1.5% in Q1 2024, reaching 429 million, indicating that while the user base is growing, it is at a slower pace compared to the competition. Companies like Square, Revolut, and even Stripe are putting pressure on PayPal to innovate and maintain market share.
Regulatory challenges have been a pain point too. In 2023, PayPal was fined $30 million by the Consumer Financial Protection Bureau for mishandling customer funds, highlighting the regulatory risks the company faces.
But perhaps the biggest issue of them all is profit margin pressures. PayPal’s operating margin for Q1 2024 was 19%, down from 21% in the same quarter the previous year, reflecting rising costs and competitive pressures.
So, Is PayPal a Buy?
In spite of the dulling growth rates, poor profit margins and heightened competition, PayPal is a standout buy on one key measure, valuation.
A 5-year discounted cash flow forecast pegs fair value at an astonishing $96 per share. Admittedly that is well above the consensus price target among analysts of $77 per share. Nonetheless, if those analysts are right, PayPal has the potential to climb by 29.2% whereas a discounted cash flow target translates to almost double that.
In addition, management has been engaged in buying back shares, a real tailwind for the stock that provides support underneath. Last year, the company repurchased $5 billion alone at an average price of $67 per share, well above the current price. Or in other words, if they thought $67 per share was a steal last year, investors today are really getting a bargain with the stock down approximately another $10 per share.
In addition, sentiment is moving in favor of PayPal too with 8 analysts upgrading their earnings estimates for the upcoming quarter. Put all those into the mix and you end up with a stock that just might be too cheap to ignore.
