Fintech giant PayPal (PYPL) has seen its valuation drop to pre-COVID-19 levels. The development is surprising, considering its strides during the pandemic. PYPL stock has shed about 45% of its value from its 52-week high price and is now highly attractive.
PayPal’s shareholders had an incredibly rough second half last year. After reaching an all-time high back in July, its stock has slid at a remarkable pace. Hence, savvy investors may want to scoop the stock during the current correction.
PayPal is a fintech platform with a virtual solution for every financial circumstance. Users can even trade cryptocurrencies, and the platform also operates peer-to-peer payment processor Venmo.
Investors were left with a sour taste in their mouths after the debacle of the Pinterest acquisition. However, the platform’s long-term case is in place, and it should continue setting records, beating the market along the way.
PayPal boasts a colossal 50% market share in the North American and European payment processing industry. Its fundamentals are in tremendous share, prompting me to believe that its recent stock market performance is a window of opportunity that cannot be ignored. I am bullish on the stock.
Robust Fundamentals
PayPal has been a top-performer in the past several years, growing its top and bottom lines at an incredible pace. In the past five years, its revenue and EBITDA compound annual growth rate (CAGR) have soared over 18% and 17%, respectively.
Moreover, its performance continues to impress as it expands its total payment volume (TPV) and active user base. PayPal reports its earnings today after market close, but here are some Q3 highlights to give you an idea of the company’s growth.
TPV rose 26% from the prior-year period to $310 billion during the third quarter. Additionally, its revenues increased by a healthy 13%, which is impressive considering its performance in the previous quarter. Moreover, active accounts also rose by 15% to 416 million during the third quarter. One of its top segments in Venmo witnessed a 36% growth in payment volumes to $60 billion.
PayPal boasts a robust balance sheet as well. It had a whopping $7.8 billion in cash and $22.1 billion in equity in the third quarter. Moreover, its $8.95 billion debt is dwarfed by its massive equity position. In Q3, PayPal experienced free cash flow growth of roughly 20%. In the past five years, the company’s levered FCF margin is at a spectacular ~20%.
Looking ahead, PayPal will continue growing at a rapid clip for the foreseeable future. In its recent investor day meeting, its management laid down some ambitious projections through 2025. PayPal will be growing its earnings by 22% per year and revenue by 20% through 2025. If it can deliver on its outlook, earnings and revenue growth will increase its stock price to new heights.
Bright Outlook Ahead
Despite the cut-throat competition in the fintech space, PayPal has held its own and continues to offer plenty to its shareholders. Recently it entered into an agreement with Amazon (AMZN) to enable its U.S.-based customers to pay using Venmo. Venmo has over 80 million users in the U.S., making it a massive opportunity for PayPal.
Moreover, PayPal recently acquired Japanese buy now, pay later solutions provider, Paidy. Japan has one of the biggest e-commerce markets, with revenue that reached $114 billion in 2020, ahead of the United Kingdom and the United States. Moreover, PYPL recently rolled out its digital wallet, which provides a more holistic experience to its users.
Furthermore, PayPal has also made its way into the crypto market. The PayPal and Venmo apps offer the ability to purchase Bitcoin and other altcoins. Cryptocurrencies have been an anomaly in the investing world for the longest time but have come of age during the pandemic.
Digital assets have immense real-world utility and will continue to grow in popularity over time. PayPal is embracing the possibilities of the industry with the talk of creating stable coins recently.
This initiative is still in the pipeline, but it shows that the company’s management has the right ideas for the burgeoning crypto market. Unlike the opinion of conventional investors, cryptocurrencies aren’t a threat to the financial system. Moreover, PayPal reported that first-time crypto users shot up 15% during the third quarter.
Wall Street’s Take
Turning to Wall Street, PYPL stock earns a Strong Buy consensus rating. Out of 34 analyst ratings, 27 Buys and six Hold ratings were assigned in the past three months, along with one Sell rating.
The average PayPal stock price target is $248.34, implying 43.7% upside potential. Analyst price targets range from a low of $160 per share to a high of $342 per share.
What to Do with PayPal Stock
PayPal is quickly becoming a one-stop shop for all daily financial needs. The platform offers a multitude of features and functionality, including saving accounts, crypto trading, and other elements. Moreover, it is the leader in digital wallets and has a sizeable edge over its peers at this time.
I believe its critics are incredibly short-sighted as they continue to ignore the massive opportunity to pounce on the company’s expanding ecosystem. Additionally, with the stock back at pre-pandemic valuation levels, it’s tough not to invest in such a robust business at such a heavy discount.
However, recent turbulence in the market has resulted in a correction in PYPL stock’s price. I believe that prudent investors should take advantage of this predicament and scoop up the stock at a bargain. Its robust financials and attractive valuation make it an excellent long-term bet.
Its peers are gaining traction in the market, which will only increase as we advance. If PayPal is unable to innovate, it might lose out on its market share and dent its stock price in the process.
However, as it stands, its revenues and cash flows will continue to grow at a staggering pace over the next several years. Its most recent partnership with Amazon, the world’s largest retailer, can add significantly to its transaction volumes in the coming year and beyond.
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