Stock Analysis & Ideas

PayPal is Trading Cheaply Despite Eye-Catching Earnings

Story Highlights

PayPal’s shares are trading at a significant bargain due to a reduction in overall digital payments, economic instability, and the company’s boycott of Russia. However, the company reported a healthy first quarter, beating analysts’ expectations, thereby proving its naysayers wrong. Moreover, its Venmo app and partnership with Amazon might open new doors for the enterprise down the line.

PayPal Holdings (PYPL) is the most prominent payment platform that is a pioneer in the space. The fintech giant has posted consistent earnings and sales growth for the past decade. Unfortunately, PayPal’s shares have shed more than 73% in the past 12 months due to macroeconomic challenges. However, investors should recognize the opportunity and consider PYPL stock.

Investors are fearful that the market might experience a decline in e-commerce transactions for the time being as the world reverts to in-person shopping, and it might also face a loss of transactions due to the Russia-Ukraine war. These concerns are genuine, but PayPal’s expanding operating scale, the addition of Venmo, and its rather attractive valuation present a hefty upside for its investors. As a result, I am bullish on the stock.

PayPal Boasts an Attractive Financial Position

In its earnings report, PayPal guided that it expects to generate $5 billion in free cash flow for the year. This massive sum might help the company undertake more projects and enhance profitability in the future. Moreover, PayPal aims to report earnings per share at $3.81 and $3.93, which is a healthy range given the current circumstances.

PayPal’s CEO, Dan Schulman, said that the company’s earnings results were impacted due to inflationary pressures, supply chain issues, and the Russia-Ukraine war. This forced PayPal to reduce its 2022 guidance. However, PayPal still beat analysts’ expectations for earnings per share.

PayPal recorded 429 million total active accounts, including 35 million merchant accounts, in its first quarter of 2022. Moreover, the company processed 5.2 billion transactions in the quarter, reporting an 18% increase year-over-year. This growth is phenomenal, considering that PayPal faced a 54% drop in the transaction volumes from eBay.

In addition, PayPal’s transactions per active account rose 11.3% year-over-year. This number shows that the company’s customer engagement isn’t slowing down anytime soon.

While PayPal can’t escape the macroeconomic headwind, there’s no denying the sustained growth in the adoption of digital payments in the long run. We are witnessing the tail end of the pandemic, and in-person shopping is likely to return in a big way. Though this should affect PayPal’s revenues, its investors mustn’t forget that digital is the future.

Venmo Could be PayPal’s Trump Card

PayPal is committed to monetizing its consumer-focused digital wallet, Venmo. This digital wallet specifically focuses on peer-to-peer payments and has certain features that can support business owners. Therefore, you can have a separate business profile on your existing Venmo and separate your work transactions from personal ones.

Here’s why Venmo is special for PayPal. The Venmo app generated $58 billion in payments, generating a 12% bump in payments on a year-over-year basis. Moreover, the growing total payment volume (TPV) amounted to $322.98 billion for the quarter, reflecting 13% year-over-year growth. The major contributor to TPV was Venmo, which means that Venmo is adding more strength to PayPal.

The company’s CEO highlighted Venmo’s importance by saying that it is a growth area that PayPal needs to focus on. As a result, Venmo could potentially become a cash cow for PayPal.

Moreover, an exciting aspect of the Venmo app is the partnership between Amazon (AMZN) and PayPal. Here’s how the partnership will work: collaboration between the two companies will allow customers to check out on Amazon using the Venmo app. This means the Venmo app will be exposed to Amazon’s massive customer base, which points to a substantial increase in active users for Venmo.

The partnership between Amazon and PayPal holds little impact currently. Nevertheless, it looks like a worthwhile venture that might yield profits in the long run and become a significant growth driver for the company.

Wall Street’s Take on PayPal

Turning to Wall Street, PYPL has a Strong Buy consensus rating based on 25 Buys, four Holds, and one Sell assigned in the past three months. The average PYPL price target is $114.39, implying 41.1% upside potential. Analyst price targets range from a low of $75 per share to a high of $180 per share.

Bottom Line: PYPL Stock is Undervalued

PayPal’s stock currently trades at 3.3 times forward sales, the lowest since the company broke even. Thus, considering the sector’s encouraging outlook, it seems like an ideal time to invest in PayPal.

Moreover, management plans to use its free cash flow to buy back shares, hopefully lowering the share price volatility and increasing shareholder rewards.

Lastly, PayPal’s first quarter results and Venmo’s growth potentially present an excellent opportunity for investors to scoop up the company’s shares and garner hefty gains soon.

Disclosure

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