PayPal (NASDAQ:PYPL) closed its first day as a publicly traded company on July 20, 2015, at $40.47 a share. On Jan. 9, 2018, PayPal stock went over $80 for the first time, doubling the PYPL stock price in approximately 30 months.
For PYPL stock to double a second time, PayPal, the company will have to continue to grow while also getting a little help from investors.
Can PayPal stock get to $200 by April 2022? I think it can. Here’s why.
To begin with, PayPal continues to deliver. When the payments processor announced third-quarter earnings results on Oct. 23, investors were concerned about the delays the company was having integrating new partners, something that could affect revenues. In addition, investors were interested in learning more about how PayPal’s contract expiry with eBay (NASDAQ:EBAY) next year could hurt the top line.
As it turned out, investors had nothing to fear, but fear itself.
In the third quarter, eBay represented 8% of PayPal’s overall revenue in the quarter. By the time the contract terminates, the contribution will be down to 6% of its total sales. The company expects the eBay situation to cost it 1% revenue growth in 2020, hardly something worth worrying about.
However, between June 23, the day before PayPal reported its second-quarter earnings and Oct. 22, the day before it reported Q3 2019, PayPal stock lost 16% of its value, or $22 billion of its market cap. It has since recovered some of those losses but still trades 17% below its 52-week high of $121.48.
To double in the same amount of time as it did in the 30 months, PayPal’s got to keep delivering at earnings time.
PayPal’s Q3 Results Were Outstanding
Analysts were expecting 52 cents a share in earnings. It delivered 61 cents. Revenues were expected to be $4.35 billion. PayPal delivered sales that were $30 million higher at $4.38 billion. As for total payment volume, PayPal processed $179 billion in payments during the quarter, 27% higher than a year earlier, and also higher than analyst expectations.
Venmo, the company’s mobile payment app, hit the cover off its business in the third quarter processing more than $27 billion in payments during the quarter with a 64% increase in payment volume.
Venmo might not yet be making money but if it keeps up this kind of growth, it soon will be.
“We would have to put more money into Venmo each year as a group and it is now, instead of a drain on our margin structure, it will help our margin structure as we go forward and I would expect that to continue to happen,” PayPal CEO Dan Schulman told those participating in the company’s conference call.
As Schulman said on the call, Venmo’s annual run rate now exceeds $100 billion. It should account for 25% of the company’s total payments processed within 12-24 months. Although, I’m sure Square (NYSE:SQ), a stock I also like, will have something to say about that.
Any way you slice it, PayPal’s Q3 results demonstrate it’s a business whose best days are ahead of it, not behind.
“PayPal’s 3Q19 results were the strongest we’ve seen in at least a year,” Lisa Ellis, research analyst at MoffettNathanson, said in a note to clients Oct. 24. “All in all, a very clean, strong, quarter.”
Valuation on PayPal Stock
PayPal stock is currently trading at 28.7 times its forward price-to-earnings (PE) ratio and 6.86 times sales (PS). I recently suggested that despite having PE and PS ratios more than double its former parent, PYPL stock is still the superior shares to own.
As I stated in the beginning, for PayPal to get to $200 by April 2022, it’s got to keep growing (it is), and it’s got to get a little help from investors (they will). That help comes from investors willingly paying seven or eight times sales and 30 or 35 times earnings.
At the moment, it appears as though investors are fretting a little over PayPal’s valuation. As more quarters like this past one come down the pike, I’m sure that the situation will change.
PayPal’s got a three-year average growth rate for revenue and earnings of 18.7% and 18.8%, respectively, according to Morningstar. With trailing 12-month sales of $17.0 billion and normalized earnings per share of $2.18, revenues should be $28.4 billion in three years while earnings should be $3.66.
At a multiple of 7x sales, PayPal should have a market cap of $199 billion. At a multiple of 30x 2022 earnings, it should have a share price of $110, not much higher than where it’s currently trading.
Clearly, the multiple for both ratios will have to expand over the next three years, if PayPal stock has a shot of hitting $200 by April 2022.
Whether it does or it doesn’t, I still like PayPal. A lot.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.