Investors clearly expect PayPal (NASDAQ:PYPL) to struggle a great deal going forward, as PYPL stock has tumbled nearly 60% so far this year. Yet it appears that investors are largely overlooking the company’s strong growth, high profits, positive catalysts, and relatively low valuation.
Indeed, I believe that the market is now undervaluing the shares to such a great extent that they can easily double in value by the end of next year.
Strong Growth and High Profits
PayPal’s total payments volume jumped 13% year-over-year (YOY) in the first quarter, while its revenue, excluding eBay’s (NASDAQ:EBAY) contribution, climbed 15% YOY. Further the number of transactions carried out on the app soared 18% YOY, and it added a net total of 2.4 million new accounts, increasing its account total by 9% YOY.
For all of 2022, despite slightly cutting its guidance and indicating that its outlook is conservative, PayPal expects its earnings per share to come in at $3.81 – $3.93. What’s more, the payments giant is predicting that it will generate impressive free cash flow of over $5 billion for the year.
PayPal has a few strong, positive catalysts. As I wrote in a previous column, although consumers are currently spending less of their money on e-commerce, I expect that trend to reverse over the longer term. That’s because I believe that “after they have had their fill of going on vacations, eating at restaurants, and shopping at brick-and-mortar stores,” which they were unable to do over much of the past two years, they will resume spending a higher percentage of their money on e-commerce. And as a digital-payments platform, PayPal will be very well-positioned to benefit from that trend.
On the macro front, inflation has hurt PayPal, the company’s CEO, Daniel Schulman, said on the company’s Q1 earnings conference call held on April 27. With many, and likely most, experts saying that inflation has peaked in the U.S., lower inflation should help boost PayPal’s results going forward.
How PYPL Stock Can Double
I believe that analysts are likely undervaluing the impact of the upcoming integration with Amazon on PayPal, as the deal is likely to be a huge game-changer for PYPL stock. Meanwhile, as I’ve written in previous columns, I think that the market is overly concerned about the possibility of a ruinous recession.
Therefore, I expect PayPal’s 2023 earnings per share (EPS)to come in close to the highest estimate provided by the analysts covering the stock. The most bullish analyst predicts that the company’s EPS will come in at $6.19. I’ll go with a 2023 EPS estimate of $6. And I believe that PYPL stock, given PayPal’s strong growth and high profitability, should get a premium price-earnings (P/E) multiple of 25 times. That combination would put the stock at $150 by the end of next year, versus its current level of around $75.
Given PayPal’s rapid growth, high profitability, positive catalysts, and potential to double by the end of 2023, long-term investors should buy PYPL stock.
On the date of publication, Larry Ramer did not have (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.