PayPal Holdings (PYPL) is a leading technology platform and digital payments company that allows digital and mobile payments on behalf of merchants and consumers internationally.
The company is dedicated to democratizing financial services to enhance the financial health of individuals, and to enrich economic opportunities for entrepreneurs and businesses of all sizes across the globe.
PayPal also facilitates P2P payments through its PayPal, Venmo, and Xoom products and services, while its other solutions include its PayPal Credit, Braintree, Venmo, Xoom, iZettle, and Hyperwallet products and services.
PayPal features a high-margin business model, through which the company has managed to grow consistently in the rapidly evolving fintech industry.
However, with competition remaining steep and other companies such as Block (SQ) growing their market share, I am cautious of the stock’s investment case. I am neutral on PayPal, as a result.
Latest Developments
PayPal’s growth over the years has been quite impressive, with its latest results illustrating the strength of its business model. Total Payment Volume (TPV) during Q3 reached $310 billion, with PayPal’s ecosystem counting 416 million active accounts.
Specifically, TPV grew 26% and 24% on an FX-neutral basis, while net revenues were $6.18 billion, rising 13% on both a spot and FX-neutral basis. Net new active accounts adds were 13.3 million. PayPal took on some additional expenses during the quarter, so its adjusted EPS also expanded, but by a humbler rate of 4% to $1.11.
I am particularly excited about the ongoing growth that Venmo experienced, with the platform processing approximately $60 billion in TPV during the quarter, implying a growth of 36% year-over-year.
Management expects PayPal’s upcoming earnings to come out quite strong as well since it forecasts FY 2021 revenue growth of 18%, including expectations for TPV growth to be in the range of ~33%-34%.
Venmo users in the U.S. will also be allowed to pay with Venmo on Amazon.com this year, which should comprise a great growth catalyst for the company following its approaching year-end results.
Valuation
Tech stocks trading at rich multiples got hammered as soon as 2022 began, and PayPal did not make for an exception.
In fact, PayPal’s shares had gotten very pricey through 2021, resulting in the stock continuously correcting since last summer. At its current price of around $157, the stock is trading 49% lower from its 52-week highs.
Following the stock’s persistent decline, PayPal now trades at 43.4 times management’s FY 2021 GAAP EPS estimate of $3.62.
I still find this multiple very rich considering the brutally competitive industry PayPal operates in. For context, Block Inc. is trading at 3.4x its FY 2021 sales, while the same multiple for PayPal is at around 8x despite the two companies sharing similar net margin prospects, and the former growing at a faster pace.
Hence, I wouldn’t be surprised if PayPal’s valuation compression were to persist further.
Wall Street’s Take
Turning to Wall Street, PayPal has a Strong Buy consensus rating, based on 26 Buys, six Holds, and one Sell assigned in the past three months. At $253.77, the average PayPal Holdings stock forecast implies 61% upside potential, nonetheless.
Conclusion
PayPal is a quality business with solid growth prospects going forward.
However, with the stock still trading at an expensive multiple following its ongoing correction over the past six months and the industry becoming increasingly more competitive, filled with higher-growth companies, I will skip on what currently looks like an attractive opportunity otherwise.
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