The Street’s worries about PayPal (NASDAQ:PYPL) stock are way overdone. Eventually, these concerns, pushing the shares down 80% from their August 2021 high of $289, will become much less intense, enabling PYPL stock to soar far above its current levels. Specifically, investors’ trepidation about PayPal’s falling profit margins and its competition from Apple (NASDAQ:AAPL) will eventually be unfounded. As a result, I view PYPL as a strong buy at its current levels.
Also importantly, the company’s new CEO is likely to boost the firm’s bottom line, while the valuation of PYPL stock remains extremely attractive.
Overdone Concerns About Apple Pay
In July, research firm MoffettNathanson issued a negative note on PYPL stock, citing increasing competition from Apple’s Apple Pay. According to Barron’s, the bank reported that “Apple Pay is available on 80% of iOS apps, compared with 44% for PayPal. That could be a problem for PayPal given the ubiquity of Apple devices.”
But globally, iPhone users spend an average of only $10.40 monthly on their apps, representing a small percentage of their total spending. And, of course, most of the world’s consumers actually have Android phones, not iPhone devices. Specifically, “Apple claims 650 million active App Store users while Google claims 2.5 billion active users.”
Moreover, MoneyTransfers.com estimated in October that “Apple Pay’s market share of online payments is 6.21%.” Given that Apple Pay has been available for several years, the data point suggests that the service hardly represents a huge threat to PayPal, which had a 40% share as of last July.
The Street, which has tremendous reverence for Apple, tends to greatly estimate how much the firm’s offerings will grow and cause headaches for its competitors. For example, before Apple TV launched, many analysts were convinced that the service would dominate the streaming space. In fact, by my predictions at the time, it became barely more than a blip in the sector.
Excessive Worries About PayPal’s Margins
The Street has also been very concerned about a slight decline in PayPal’s margins, as its operating margin shrank from about 23% in Q2 2019 to 22.2% in Q3 2023. During the coronavirus pandemic, the company’s operating margin reached a high of 28%.
Large investors sometimes get obsessed with profit margins, causing the shares of companies whose margins are dropping to sink sharply. Eventually, however, increases in total profits usually cause stocks to climb. For evidence of that assertion, consider large oil companies, which have notoriously low margins but have generally managed to keep their stocks moving higher over the years.
And PayPal’s profits have generally continued to climb meaningfully, jumping to $3.76 billion in the 12 months that ended in September 2023 from $2.42 billion in the 12 months that ended in September 2022.
PYPL Stock: Cost Cutting and an Attractive Valuation
As I noted in a previous column, PayPal’s new CEO, Alex Chriss, said on Nov. 1, “Simply put, our cost base remains too high, it is actually slowing us down.” The CEO indicated he would sharply cut the firm’s costs going forward.
As PayPal reduces its spending, its margins will likely increase, making the Street more bullish on PYPL stock.
Finally, PYPL stock has a very low, attractive forward price-earnings ratio of 11 times.
On the date of publication, Larry Ramer 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.
