For fintech and payments industry companies, it’s just brutal out there right now. Somehow, every week and month, they find a way to plumb new lows. PayPal Holdings, Inc. (NASDAQ:PYPL) hasn’t been immune to this trend. In fact, PYPL stock has astonishingly dropped from a high of $310 to just below $74 over the 12 months.
Normally when a company plummets more than 75% from its 52-week highs, there is reason to question whether said company is a viable going concern. Here, however, PayPal is in no particular financial distress. Quite contrary, the company remains highly profitable and its 2022 earnings haven’t even been particularly terrible.
Rather, PayPal is the story of a company that went from grossly overvalued last year to, arguably, quite the bargain today.
Let’s put some numbers on it, though. Just how much should PayPal be worth? First, let’s see what one analyst is predicting for the company.
|PYPL||PayPal Holdings, Inc.||$73.71|
Is PayPal Stock Worth $139 Per Share?
According to one professional, the answer is yes. Morningstar’s senior equity analyst Brett Horn sees fair value at $139. With that price target in mind, PYPL stock is near a 50% discount at today’s levels.
Horn acknowledges that there is a wide range of potential outcomes for PayPal. However, in the majority of cases, he says, PayPal will have significantly more value than it currently trades at.
Importantly, Horn notes that PayPal has very little actual exposure to cryptocurrency. Bitcoin (CCC:BTC-USD) and other cryptos make up a minimal piece of PayPal’s earnings today. And, it wasn’t particularly likely that this would change in the future.
Rather, PayPal used crypto as a marketing engagement tool to attract consumers to its Venmo platform. Perhaps PayPal will have to spend more on marketing the peer-to-peer app in other ways as cryptocurrency crashes. However, don’t expect PayPal’s earnings to slide simply because crypto is in freefall.
Everyone’s Calls It an ‘Outperform’
To be sure, there’s a wide range of opinions out there. Capital IQ has an average rating of “outperform” on the stock with price targets ranging from $82 a share to $220. As of Thursday afternoon, there have been few target cuts, save for Credit Suisse’s $5 trim to $95 a share. Yet, they still have an “outperform” tag on the stock.
Analysts do see PayPal’s earnings dropping moderately in 2022 after a boom year in 2021. However, even with 2022’s slowdown, analysts see the company earning $3.90 per share in earnings in 2022.
Going forward, analysts see this jumping to $4.83 in 2023, and $5.87 in 2024. That puts PYPL stock at an estimated 19 times this year’s earnings, with that dropping to less than 13x projected 2024 earnings. It seems the market is skeptical that PayPal will actually hit these estimates. Since, if it merely hits that 2024 level, it’s hard to deny that the stock is a deal at today’s price.
Stuck In The Middle
One thing that has potentially stopped PYPL stock from attracting a bigger bid is that it is caught in an awkward place right now. It’s not the cheapest payments stock out there. Nor is it the highest-quality. Being in the middle has prevented either the deep value crowd or the superior businesses investors from stepping into PayPal yet. Let’s quantify this.
There are dirt cheap payments stocks such as Global Payments (NYSE:GPN) today. Global Payments is a merchant acquirer for the credit card companies and has rapidly acquired fast-moving payments businesses to layer on top of that as well. GPN stock is selling for less than 12 times earnings today, and just 9x estimated 2024 earnings. For another, Fiserv (NASDAQ:FISV) is a payments giant that has a fast-growing small merchants acceptance platform, Clover, which should earn a premium valuation on top of the rest of its business.
And, at the other end of the barbell, the low-risk credit card giants such as Visa (NYSE:V) also are interesting. Visa shares have slid more than 20% from their highs and are selling at one of their lowest ever P/E ratios. The appeal of a credit card company like Visa is that there is no credit risk. Visa simply collects fees on every one of the millions of transactions that passes through its network each day. Visa has a long history of growing earnings at a double-digit annualized clip and is on sale now.
PYPL Stock Verdict
Personally, I see more value in the cheapest names in the sector, such as Global Payments and Fiserv. And for the so-called “sleep well at night” picks in the sector, it’s easier to get on board with Visa and Mastercard (NYSE:MA).
That said, there’s a good argument for virtually the entire payments industry being undervalued right now. Even ARK Fintech Innovation ETF (NYSEARCA:ARKF) is trading at almost 70% below its 52-week high.
PayPal isn’t my favorite stock in its sector. But if the whole sector is set to go up, PYPL stock will rally with it. If you’re particularly attracted to PayPal’s distinct set of businesses and future growth opportunities, this is a fine entry point.
One note for today. PayPal stock will move into the Russell 1000 Value index and its weight in the Russell 1000 Growth index will decrease. That rebalancing move will likely result in a volatile June 24 session for PYPL stock.
On the date of publication, Ian Bezek held a long position in GPN and V stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.