PayPal (NASDAQ:PYPL) released stellar results for Q4 and 2020 on Feb. 3, the strongest in its history, and indicated a high growth outlook for 2021. I believe this should continue to push PYPL stock higher over the next year.

The single most important factor affecting PayPal’s revenue and earnings is its Total Payment Volume (TPV). This is the total number of transactions times the value of those transactions. PayPal generates revenue by charging fees on those transactions.

So we can predict its revenue based on the TPV growth. Another way to look at this is to consider revenue divided by TPV as the take rate. The take rate times TPV equals revenue. If both the TPV and the take rate rise, revenue rises a lot. If one rises but the other falls, revenue growth might be muted.

Growth and Valuation

Last year, PayPal grew its TPV, but its take rate fell slightly. For example, page five of the earnings release shows that its Q4 TPV grew by 36%. And for the full year, it grew 31% to $936 billion, up from $712 billion.

Net revenue grew from $17.77 billion to $21.45 billion, up 20.7%. This implies that the take rate declined slightly from 2.496% (i.e., $17.77 billion / $712 billion) to 2.29% ($21.45 billion / $936 billion). That is why its revenue growth was not as fast as its TPV growth.

But PayPal also gave us guidance in its earnings release for its TPV growth this year. They indicated on page six that its TPV would grow in the high 20% range. In fact, the company provided specific guidance on its revenue growth, indicating that they expect it to hit $25.5 billion, up 19% over the $21.46 billion it produced in 2020.

This will lead to a commensurate increase in its free cash flow, assuming margins stay the same. The company said it expects non-GAAP earnings per share (EPS) will grow by 17%, even though its Q1 2021 EPS will rise over 50%. I think the company might be too conservative here.

The bottom line is that investors should expect that EPS will grow at least 17% from $3.88 in 2020 (non-GAAP) to $4.54 in 2021. That puts the stock on a forward price-to-earnings (P/E) rate of about 60 times. However, analysts surveyed by Seeking Alpha have an average 2022 EPS forecast of $5.74, up 26%. That lowers the forward P/E multiple to just 48 times.

Where This Leaves PYPL Stock

This is a high multiple but not that high, given its history. For example, Morningstar points out that PayPal has had a five-year average P/E ratio of 55.5 times. The way I use this is to multiply the 2022 forecast EPS by the average P/E, and then discount it to the present.

For example, 55.5 times $5.74 (2022) results in a price target of $318.57. That represents a potential gain of 16.7% from the current price. But it is also one year and eight months out (1.75 years). Using a 10% discount rate over that period results in a present value of $269.61, or just slightly below today’s price.

In other words, today’s price is fairly valued for an investor who expects to make a minimum 10% return on a compounded basis over the next 1.75 years. By the end of 2022, one would expect the price to be $318.57 at this rate.

However, that is a baseline projection. If the company produces better-than-expected results, expect to see PYPL stock rise above $318.57.

For example, if PayPal ever decided to allow its customers to buy and sell Bitcoin (CCC:BTC-USD) it would experience a huge surge in transactions. This is what has happened at Square (NYSE:SQ). Why they don’t allow this directly now sort of baffles me, given the additional profitability this could provide the company.

Nevertheless, growth investors can expect to see PYPL stock rise to $318.57 sometime in the next year. This is based on the company’s guidance and analysts’ earnings projections.

On the date of publication, Mark R. Hake held a long position in Bitcoin and Square.

Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.