PayPal Isn’t a Perfect Stock, But It’s Undeniably Cheap

PYPL stock - PayPal Isn’t a Perfect Stock, But It’s Undeniably Cheap

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PayPal (NASDAQ:PYPL) is a leading online payments and digital services platform. However, it — like many tech companies — has seen results tail off as e-commerce slows down following the shop-at-home era of 2020 and 2021, which has been bad news for PYPL stock.

PayPal recently shocked the market with a worse than expected earnings report, and guidance and PYPL stock went tumbling. Those losses came on top of what was already a terrible run for PayPal; shares are now down nearly 60% year-to-date.

The earnings report saw a one-two punch. Revenue growth is now expected to slow significantly against prior forecasts. That’s not all that surprising given the broader slowdown we’ve seen in e-commerce this earnings season. Still, it’s not great news for PayPal in particular.

And it seems there is an issue on the profit margins front as well as PayPal slashed its earnings per share guidance. It now see non-GAAP EPS being in the range of $3.81 to $3.93 this fiscal year versus prior guidance of $4.60 to $4.75. That’s a 17% decline and caused a lot of analysts to slash their outlooks for the company going forward.

With the tech sector slumping anyway, there’s a case for avoiding PayPal until the business stabilizes.

The counterpoint to these concerns is that PayPal is selling at one of its lowest valuation levels in years. Even with the forecast decline in earnings this year, PYPL stock is still going for just 20 times this year’s revised estimates.

That moves to 16 times 2023 and 13 times projected 2024 earnings. Now, it’s possible that analysts are too upbeat. They are seeing 26% EPS growth in 2023 and another 22% increase in 2024.

Given the decline in 2022 and the increasing headwinds in the payments space, it might be too ambitious to see earnings growth returning to above 20% annually. Even if PayPal starts growing earnings again, at, say, 12% per year off a starting 19 P/E, however, that should be quite profitable for investors.

The only issue with the valuation argument is that other payment companies are even cheaper. Fiserv (NASDAQ:FISV) is trading at just 15 times this year’s projected earnings, and analysts see it growing earnings double-digits this year rather than shrinking like PayPal. Fiserv historically has grown at more than 10%/year, making it a strong bargain at its current P/E ratio.

For another, Global Payments (NYSE:GPN) is going for just 13 times forward earnings and is also growing at a double-digit clip. This puts PYPL stock in the slightly awkward space of being not quite as cheap as its peers, but having also lost its luster for growth investors.

Regardless, if you like Paypal’s individual businesses or are bullish on payment companies in general, PYPL stock could be worth buying here.

On the date of publication, Ian Bezek held a long position in GPN stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.


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