PayPal (PYPL) stock is down nearly 4% in 2024, as the fintech company missed out on the H1 stock market rally. The stock has closed in the red for three consecutive years, and has been squarely out of favor with markets. However, PYPL now looks like a no-brainer value stock that could recover in the back half of the year, as we’ll discuss in this article.
PayPal shares peaked above $300 in mid-2021, and since then, investors haven’t had much to cheer about. PYPL fell to multi-year lows in 2023, despite a broad-based rally in tech shares, and now trades at a fraction of its all-time highs.
Wall Street analysts haven’t been too bullish on the stock, but PayPal has earned two upgrades over the last month or so. On Tuesday, Susquehanna upgraded PYPL stock from “neutral” to “positive,” while maintaining its $71 target price. And on May 31, Mizuho analyst Dan Dolev likewise upgraded PayPal stock from “neutral” to “buy,” while raising his target price from $68 to $90. The same day, New Street Research initiated coverage on PYPL with a “buy” rating and a $80 target price.
PYPL Stock Forecast
Overall, of the 40 analysts covering PayPal, 14 rate it as a “Strong Buy,” while 3 call it a “Moderate Buy.” The remaining 23 analysts rate PYPL stock as a “Hold.” Its mean target price of $74.55 is 26.4% higher than Tuesday's close, while the Street-high target price of $90 is almost 53% higher.
PayPal’s Valuations and Financials Resemble a Value Stock
About a couple of years back, PayPal was included among the ranks of growth stocks. However, after the dismal price action since mid-2021, PayPal’s valuations have plummeted, and it now resembles a value stock.
Looking at the valuation metrics, PayPal trades at a next 12 months (NTM) price-to-sales multiple of 1.89x, while the NTM price-to-earnings (PE) multiple is 14.2x. PayPal expects to generate free cash flows of around $5 billion in 2024, and given its current market cap of around $62 billion, we get a 2024 price-to-free cash flow multiple of 12.4x. Far from trading at a premium to the S&P 500 Index ($SPX), PayPal now trades at a significant discount to the average index constituent.
To be sure, the current valuation discount is not without reason. Analysts expect PayPal’s revenues to rise 7.6% in 2024 and 8.3% in 2025. The company’s revenues rose in a similar ballpark in the previous two years, as well. Contrast that with the 20.7% and 18.3% YoY revenue growth that PayPal posted in 2020 and 2021, respectively, and we start to see the roots to PayPal’s dismal price action, as well as its tepid valuations.
Also, with rising competition, digital payment companies have been feeling the pressure on their take rate (the fees they charge for processing the transaction). PayPal’s GAAP operating margin, which hit 18.1% in Q2 2020 despite higher credit losses that quarter, fell to 15.2% in Q1 2024.
Is PayPal Stock a Buy?
Certainly, PayPal faces multiple headwinds. First, the percentage share of e-commerce sales in total U.S. sales peaked at around 16.5% in Q2 2020 amid the COVID-19 lockdowns, but currently stands at around 15.9%. To make things worse, rising competition – including from Apple (AAPL) Pay – is hurting PayPal’s margins.
However, I believe PYPL’s valuations are too tempting to ignore, especially as the broader market valuations appear a bit stretched. It's tough to scout markets for stocks that have a good margin of safety and trade at reasonable valuations, and PayPal is one such name.
PayPal has reiterated multiple times that it is focusing on profitable growth, and during the Q1 2024 earnings call, CEO Alex Chriss said that the company is “in the early innings of driving a meaningful and comprehensive transformation of PayPal to deliver the sustainable and high-quality growth.”
PayPal is undergoing a transformation, and as part of that exercise, it is cutting costs and is redefining its strategic priorities. The company has revamped its app, and is looking to “unlock new sources of revenue and margin expansion opportunities” by leveraging data.
All of that said, while PayPal might still see some downside from these levels amid a fall in broader markets, I believe it is one value stock that will see a rerating in the next couple of years, which - coupled with an increase in earnings - makes it a no-brainer value stock to buy at these prices.
On the date of publication, Mohit Oberoi had a position in: PYPL , AAPL . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
