PayPal Holdings (NASDAQ:PYPL) stock is now well off of its highs at $182.66 as of Dec. 20. This is because PYPL stock is down $121.78 from $358.53 when it peaked at this level on July 23.
This represents a 34% drop off of its peak price, just over one-third down. That makes it quite a bargain now. It does not seem likely that PYPL stock will stay this cheap. This article will explain why.
I suspect that the stock is at a trough right now. It’s likely to rebound next year, especially after analysts see how well the company is growing.
Where This Leaves PayPal
One reason for my optimism is that PYPL stock trades at a forward price-to-sales multiple of just 7.25 times. This is based on Seeking Alpha’s survey of 46 analysts. You can see this from its market capitalization of $221 billion compared to analysts’ forecast for 2022 sales of $30.18 billion.
Moreover, these analysts expect PayPal sales to grow over 19% than the $25.36 billion forecast for 2021. That is why PYPL stock has a robust price-to-sales metric right now.
This is after the company said that it expects its revenue to rise 18% this year over last year. In other words, despite the company’s large size, its revenue is still on fire.
In addition, analysts also predict that its earnings will rise 29.5% to $5.31 per share, up from $4.61 in earnings per share (EPS) this year. That puts PYPL stock on a relatively cheap price-to-earnings (P/E) multiple of just 35 times.
This is not cheap compared to many other stocks. However, in the tech world, this is not that high a multiple. And this is especially so given the company’s consistent track record of producing earnings growth.
Historical Valuation Comps
Morningstar reports that in the last 5 years, PYPL stock has traded at an average price-to-sales multiple of 8.8 times. Since right now it is trading at just 7.25 times on a forward basis, this shows that it is at a bargain level.
Moreover, the same thing applies to its historical P/E multiple. Morningstar’s valuation report indicates that the stock has had an average P/E of over 59 times in the last 5 years.
Now, since right now PYPL stock is trading at a forward P/E of just 35 times this makes it appear undervalued. In fact, even if we just use 2021 estimated earnings, the stock is at a P/E of 40.4 times. so even without the forward earnings forecast, the stock is at 68.2% of its historical average. This implies that its upside is 31.8% from here.
That leads us to estimate that the price target for PYPL stock is $252.25 per share (i.e., 1.381 x $182.66 price today).
What To Do With PYPL Stock
It turns out that Wall Street analysts are still very bullish on PYPL stock, as I am. In fact, their average price targets are higher than mine.
For example, Seeking Alpha reports that its survey of 47 analysts results in an average price target of $275.29. That represents a potential upside of 47.9% over today’s price (Dec. 17) of $182.66. That is higher than my price target of $252.25.
In addition, TipRanks.com reports that 31 analysts have written about PayPal in the last 3 months with 12-month targets. The average price target for these analysts is $272.62 per share. That represents a potential upside of 46.4% over today’s price.
This shows how strong most Wall Street analysts feel about PYPL stock. As a result, I highly suspect that the stock will rebound in 2022. Therefore, this might be a good time for long-term value players to begin taking a stake in the stock. Or they can average cost down in any existing PYPL stock position to take advantage of this bargain price.
On the date of publication, Mark Hake did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Mark Hake writes about personal finance at mrhake.medium.com and Newsbreak.com and runs the Total Yield Value Guide which you can review here.
