PayPal Holdings (NASDAQ:PYPL) stock is now well off of its high of $308.53 on July 23. As of Jan. 4, 2022, PYPL stock is now at $191.14. That represents a drop of $117.39 per share in the last six months or a 38% fall from its highs.
Moreover, just to regain that peak price, it implies that PYPL stock has to rise 61.4% from where it was yesterday (i.e., $308.53/191.14-1). Nevertheless, I think that is clearly possible, especially given analysts’ estimates.
This is likely to move PYPL stock significantly higher before the end of the year. Here are some reasons why.
Analysts Views on PayPal Stock
Recently Barron’s reported that an influential analyst has upgraded his view on the stock. According to Barron’s, BMO analyst James Fotheringham wrote in a note on Jan. 3 that PYPL stock deserves an Outperform recommendation.
He based his recommendation on normalized 2023 estimates, now that the year-end of tax-loss selling seems to be over. This is despite the fact that technology stocks have recently been de-rated due to semiconductor chip challenges.
The core of his upgrade relates to his view that “valuation risks are now skewed to the upside.” That is analyst-speak for a simplified version of “the stock is cheap.”
Let’s look at some reasons why that could be the case.
Historical Valuation Estimates for PayPal Stock
As I pointed out in my recent article on PYPL stock in late December, PayPal stock trades below its historical metrics. For example, historically in the last five years, it has had an average 8.8 times Price-to-sales (P/S) multiple. That means that its market cap has typically been over eight times its historical sales.
Given that we are now past 2021, we can use analysts’ estimates for 2021 sales (even though we don’t know the exact number yet). Seeking Alpha shows that analysts’ sales estimates for 2021 are for an average of $25.35 billion. That is slightly under yesterday’s market value of $224.5 billion.
Moreover, given that analysts now forecast $30.14 billion in sales for 2022, its target market cap for 2022 will be $265.2 billion. That implies a 20% gain over yesterday’s $224.5 billion market value. This puts the target price for PYPL stock at $229.37 per share (i.e., 1.2 x $191.14 price yesterday).
The same can be done using its historical price-to-earnings (P/E) ratio. Morningstar indicates that its average P/E multiple has been 59.4 times in the last five years.
Given that analysts estimate earnings per share (EPS) of $4.61 for 2021, using 59.4 times multiple puts its value at $273.83 per share. Again, this is well over yesterday’s price. It implies an upside of 43.3% over yesterday’s price of $191.14 per share.
Averaging these two, $229.37 using a historical P/S multiple, and $273.83 with a historical P/E multiple, results in a price target of $251.60 per share. That is 31.6% over yesterday’s price.
What to Do With PYPL Stock
Wall Street analysts are also bullish on PYPL stock. 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 $273.52. That represents a potential upside of 43% over yesterday’s price (Jan. 4) of $191.14.
That is higher than my price target of $251.60 using its historical P/S and historical P/E multiples.
The same is true with TipRanks.com. Their survey of 32 analysts is an average target price of $269.07 per share. That is over 40% higher than yesterday’s price.
Similarly, Yahoo! Finance, which uses Refinitiv survey data, shows that 45 analysts have an average target price of $272.38. This is over 42% higher than yesterday, and well over my price target of $251.60.
In other words, based on both its historical valuation metrics as well as analysts’ price targets, PYPL stock looks very cheap here. Look for the stock to rebound at least 32% to $251.60, and probably much higher if you believe analysts’ targets.
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 on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.
