Alert: 27% Upside in Maligned Fintech Play

Investment Alert: Buy PayPal (PYPL) Under $57/share

Disclaimer: Investment Alerts have a medium to long-term time horizon. These do not constitute financial advice and you should contact a financial advisor before deciding whether it is appropriate for your individual circumstances.

It’s really hard to explain away why Paypal has been so beaten down this year. With the market up close to 20% for the year, Paypal is down by almost 25%. That kind of underperformance is exactly why some investors run away from stock-picking and straight to exchange-traded funds. But it’s also why some investors far outperform the market indices, by finding top companies that are under-appreciated and buying them before they bounce back. Is PayPal in that latter category?

Key Points

• PayPal is technically over a long time span but showing signs of breaking back into bullish mode following a recent bull flag formation.
• Fundamentally, the stock is undervalued with over 27% upside to fair value.
• Over the past decade, revenues have grown YoY each quarter alongside operating income, highlighting the disconnect between the fundamental and technical pictures.

PayPal Is Stunning

Sometimes you have to separate a chart from the fundamentals. Make no mistake about it, though, PayPal’s chart is dreadful and has been for some time. Look no further than this multi-month display below.

Yet in spite of the poor technicals, a brighter picture of valuation emerges underneath. Take for example this surprising statistic. Over the past eight years, PayPal has not reported a single quarter of negative year-over-year revenue growth.

Or this one: ten years ago quarterly top line was $1.87 billion while in the most recent quarter it was $7.4 billion. And during that span every single quarter has enjoyed operating income in the black.

As a result of the stunning P&L, PayPal’s balance sheet is a thing of beauty too, with cash and equivalents up to $11.5 billion from $2.2 billion a decade ago.

Just about any way you slice and dice the financials of PayPal you end up with a company that is steadily steamrolling higher, year after year, and yet the technicals paint a contrasting picture. And that’s arguably where the opportunity lies, in valuation.

Is PayPal Stock a Buy Now?

The signs are plain to see for investors that PayPal is on sale now, at least according to those with an information advantage. That’s because the Board of Directors approved a $1 billion share repurchase scheme.

It’s not particularly surprising to see why they’re betting on their own shares going higher, especially given how analysts see over $20 of upside at this time from the current mid-$50s share price.

PayPal’s price-to-earnings ratio further signals that the stock is anything but expensive, with a ratio in the mid-teens. And trading just north of two times sales is a further breadcrumb that the company’s valuation falls squarely at the low end of the spectrum.

Detractors may point to stiff competition from rivals encroaching on market share but even then it’s hard to make a case that it’s eroding at the financials, which continue to grow, or the firm’s moat which is strong and evident from a 12.3% ROIC.

The bottom line is PayPal at this time is showing all the hallmarks of a stock that can move higher once it breaks out of its technical downtrend, and luckily now it has peeked above a bull flag formation, so the time may be opportune.