Is Wall Street Underestimating PayPal Stock’s Potential?

We think PayPal (PYPL) stock could be a good value buy. It is currently trading lower than average valuation, is growing, even though modestly, and has strong margins to go with its low valuation.

Buying stocks with low valuations or trading well below their peaks but maintaining strong margins allows investors to capture mean reversion and valuation re-rating potential. The downside risk is potentially less because high-margin businesses can sustain earnings and recover faster when sentiment or market conditions improve

What Is Happening With PYPL

PYPL may be down -30% so far this year but is now 35% cheaper based on its P/S (Price-to-Sales) ratio compared to 1 year ago, and also trades at a P/E (Price-to-Earnings) ratio that is below S&P 500 median.

The stock may not reflect it yet, but here is what’s going well for the company. PayPal boosts profitability via cost discipline, AI in customer support, and prioritizing higher-value Braintree transactions. Though total transactions decreased, excluding lower-margin service providers, volumes grew, shifting to quality revenue. Venmo’s 97.1 million active users and expanded commerce features significantly monetize. “PayPal Open” and AI partnerships also drive future revenue. Despite these, its discounted P/E, near a 10-year low, indicates market’s AI focus and competitive concerns.

PYPL Has Reasonable Fundamentals

• Revenue Growth: 4.5% LTM and 6.7% last 3 year average. Low growth, but this is a margin and value play.
• Strong Margin: Nearly 17.9% 3-year average operating margin.
• No Major Margin Shock: PayPal has avoided any large margin collapse in the last 12 months.
• Modest Valuation: Despite encouraging fundamentals, PYPL stock trades at a PE multiple of 11.6

Below is a quick comparison of PYPL fundamentals with S&P medians.

*LTM: Last Twelve Months

But What Is The Risk Involved?

While PYPL stock may be a compelling investment opportunity, it’s always helpful to be aware of a stock’s history of drawdown. PayPal lost about 20% during the 2018 correction, dropped 31% amid the Covid pandemic, and plunged over 83% in the inflation shock. Even with strong fundamentals, the stock has seen sharp declines when markets turn sour. It shows that no matter how solid the story, risk is real when volatility hits. But the risk is not limited to major market crashes. Stocks fall even when markets are good – think events like earnings, business updates, outlook changes. Read PYPL Dip Buyer Analyses to see how the stock has recovered from sharp dips in the past.

For more details and our view, see Buy or Sell PYPL Stock.

Stocks Like PYPL

Not ready to act on PYPL? Consider these alternatives:

1. Accenture (ACN)
2. ONEOK (OKE)
3. Lululemon Athletica (LULU)

We chose these stocks using the following criteria:

1. Greater than $2 Bil in market cap
2. Meaningfully below 1Y high
3. Current P/S < last few year average
4. Strong operating margin
5. P/E ratio below S&P 500 median

A portfolio of stocks with the criteria above would have performed has follows since 12/31/2016:

• Average 6-month and 12-month forward returns of 12.7% and 25.8% respectively
• Win rate (percentage of picks returning positive) of > 70% for both 6-month and 12-month periods
• Strategy consistent across market cycles

The Right Way To Invest Is Through Portfolios

Single stocks swing wildly but staying invested matters. A well built portfolio keeps you invested, captures upside and softens the blows from individual stocks

The Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has a track record of comfortably outperforming its benchmark that includes all 3 – the S&P 500, S&P mid-cap, and Russell 2000 indices. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.