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PayPal: An Overvalued Stock That’s Lacking Efficiency
Stock Analysis & Ideas

PayPal: An Overvalued Stock That’s Lacking Efficiency

PayPal (PYPL) is a digital payments platform that allows peer-to-peer transactions, buy-now-pay-later financing options, cryptocurrency transactions, and more. I am bearish on the stock.

Weakening Fundamentals

PayPal showed signs of slowing down in its fourth-quarter report when it was communicated that the firm only added 9.1 million accounts versus the 13.3 million in the previous quarter, ultimately leading to an earnings miss of 1 cent per share.

Many analysts overlook the 12.1% year-over-year softening of the firm’s cash-flow-to-CapEx ratio, which is concerning considering that PayPal’s CapEx only grew by 4.85% during the past year.

Furthermore, PayPal’s return on invested capital has crumbled by 26.9% (year-over-year). The provides cause for concern for two reasons. First of all, is the fact that a reduction in ROIC might mean that a company is losing its competitive advantage; and, secondly, a lower ROIC implies that investors are getting lower value for money.

Downgraded at Bank of America

Earlier this month, Bank of America analyst Jason Kupferberg recently downgraded PayPal from Buy to Neutral, citing the firm’s business strategy pivot and macroeconomic headwinds as the primary reasons for his bearish sentiment.

According to Kupferberg: “In our view, PYPL’s business is not broken. In hindsight, the company overestimated the sustainability of tailwinds induced by the pandemic and related stimulus, but we believe PayPal retains a robust competitive footprint.”

A Significant Decrease in Website Traffic

According to TipRanks’ website activity tracker, it’s likely that PayPal’s website traffic during January and February was subdued. This relates to what Kupferberg mentioned in his bearish analysis by illustrating the dropback of COVID-19 tailwinds.

There’s clearly been a solid historical correlation between PayPal’s stock price and website clicks, suggesting that we may see more drawdowns in its stock price if consumer interest doesn’t reignite soon.

The Stock Is Still Overvalued

Despite shedding more than half of its market value during the past year, PayPal’s stock remains overvalued on a sector relative basis. For valuation purposes, it’s crucial to observe the stock on a sector relative basis as the influx of digital payment solutions in recent years makes up for a more competitive landscape.

PayPal’s price-to-sales and price-to-earnings ratios are trading at sector premiums of 48% and 21.5%, respectively. In addition, a forward PEG ratio of 1.6x suggests there’s little sign that the company’s future earnings will make amends. Thus, I believe PYPL stock could be set for a multi-year drawdown.

Wall Street’s Take

Turning to Wall Street, PayPal has a Moderate Buy consensus rating, based on 26 Buys, 10 Holds, and one Sell assigned in the past three months.

The average PayPal stock price target of $182.36 implies 55.2% upside potential.

Concluding Thoughts

Key components such as decreasing factor productivity, cooling pandemic tailwinds, and increasing market competition have led to PayPal’s recent capitulation. Furthermore, key valuation metrics suggest that further downside could be on the cards unless we see an earnings recovery.

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