In a sudden and sharp reversal on Wall Street that many have been warning about for months, red-hot tech stocks have fallen off a cliff in early September, with the Nasdaq shedding 10% in a matter of days. This selloff has been widespread and indiscriminate, dragging down even high-quality and fairly valued tech names like PayPal (NASDAQ:PYPL) stock.
But the recent weakness of PYPL stock is little more than a golden buying opportunity for long-term investors.
This selloff of tech stocks will end soon. When it does, tech stocks will resume their longer-term uptrend. That will be especially true for PayPal stock, since the company is supported by robust, long-term growth fundamentals, and its valuation is now discounted.
So,when it comes to PayPal, forget the noise. Buy the stock on weakness, weather the storm and hold onto the shares for long-term gains.
Here’s a deeper look:
PayPal’s long-term growth fundamentals are rock-solid.
The transition from physical to digital shopping — and by extension, the transition from physical to digital payments — has been underway for several years. That change has caused PayPal’s volumes, revenues, profits and stock price to rise rapidly.
By closing down physical shopping channels and forcing everyone online. Covid-19 meaningfully accelerated this transition.
This acceleration is permanent. Technology has improved to the point where the online-shopping experience is just as good as in physical stores. When shopping on websites, consumers can get products delivered on the same day or the next day, get help from AI-powered chatbots, and leverage augmented reality technology to visualize items.
But of course, online shopping is still significantly more convenient than going to physical stores because consumers don’t have to leave their homes when they’re shopping online.
Consequently, over the next decade, e-commerce’s penetration of total retail sales in the U.S. will rise from about 10% today to 20%, 30%, 40% and higher.
Of course, as that transition occurs, the volume of digital payments in the U.S. is going to soar, since consumers cannot use cash to pay for things online. PayPal is the king of digital payments, with an ecosystem that dominates both desktop payments through its PayPal products and mobile payments with its Venmo offering.
Importantly, this ecosystem is protected by multiple competitive advantages, including tons of partnerships, unparalleled convenience, seamless access across the the internet landscape, a household brand name and second-to-none payment technology.
Therefore, over the next decade, PayPal will continue to generate robust volume, revenue and profit growth. All of that growth will, in turn, fuel continued gains by PYPL stock.
The Discounted Valuation of PayPal Stock
The attractive aspect of PayPal stock now is that the recent, indiscriminate selling of tech stocks has plunged the shares into undervalued territory. Yet there have not been any material changes to its fundamentals, so the downturn has created an attractive entry point in PYPL stock.
PayPal will leverage the growth of global digital payments through its flagship PayPal system and its expanding presence in the mobile payment world through its Venmo offering to generate 20%+ revenue growth for the next few years, and 10%+ revenue growth into 2030.
Its expenses will continue to increase around 15%, in-line with the historical average,for the next few years, before dropping to less than 10% subsequently. That will pave the way for consistent profit margin expansion up to and above 30%.
Based on those assumptions, I estimate that PayPal’s 2030 earnings per share can reach about $17.40.
Using a forward earnings multiple of 25 times, which is average for the sector, results in a 2029 price target for PYPL stock of $435. Discounted back by 8.5% per year, that results in a 2020 price target for PYPL stock of nearly $210.
Nothing about these fundamentals has changed over the past week. The shift from physical to digital remains robust. PayPal’s dominance remains unparalleled, and interest rates are still zero.
The only thing that has changed is that the PYPL stock price has dropped from above $210 to below $190.
So buy the shares on weakness, as this attractive dislocation of PayPal stock won’t last for long.
The Bottom Line on PYPL Stock
The recent tech sector selloff is offering up some golden buying opportunities to investors.
PYPL stock is one of those golden buying opportunities.
So buy this long-term winner while it’s on sale, weather the storm, and sell it at much higher prices in the future.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm.