In a column about PayPal (NASDAQ:PYPL) published on Oct. 19, 2023, I wrote that “PYPL stock trades at bargain-basement levels and has a new, up-and-coming CEO. Additionally, I believe the Street is overly worried about threats to PayPal’s dominance.” And I advised investors to “buy the shares on weakness.”
That turned out to be pretty good advice as shares jumped 20% between Oct. 19 and May 6. Also noteworthy is that, during the same period, the shares of SoFi (NASDAQ:SOFI), a popular fintech name that I’ve been bearish on, fell 6%. And now, after PayPal reported standout first-quarter results and with its shares still trading at very low valuations, I continue to recommend that growth-at-a-reasonable-price investors buy the shares. Also importantly, the company has multiple, potential and strong positive catalysts.
PayPal’s Strong Q1 Results
The fintech giant’s top line advanced 9.4% last quarter versus the same period a year earlier to $7.7 billion while its total payment volume (TPV) jumped an impressive 14% year-over-year (YOY) to $404 billion and its earnings per share rose 27% YOY to $1.08.
The company’s continued strong revenue and TPV growth show that the Street’s worries about the firm losing market share to Apple‘s (NASDAQ:AAPL) Apple Pay are completely unfounded. And the large increase in its EPS suggests that the cost controls implemented by the firm’s new CEO Alex Chriss are bearing fruit.
Low Valuation + Positive Catalysts = Buy
Despite the recent, strong gains of PayPal stock, the name’s valuation continues to be exceptionally low and attractive.
Indeed, the shares have a forward price-earnings ratio of 15.3x and an enterprise value/EBITDA ratio of 9.2 times. Given PayPal’s rapid revenue growth and the large increase in its profits, I believe that the stock remains extremely undervalued.
On the catalyst front, the firm is testing a new, fast checkout feature. According to Chriss, almost 80% of the consumers who have used the feature in tests utilize PayPal to pay when they check out again. Moreover, the conversion rates of the merchants who use it rise about 10%, the CEO reported.
Given these points, I believe that this offering will significantly increase PayPal’s payment volumes while enabling it to convince more vendors to utilize its platform.
Chriss also indicated that the firm is working harder than under his predecessor to market its fraud-prevention solution. Finally, PayPal has been convincing more small and medium businesses to use its Complete Payments suite. The CEO indicated that the companies that utilize this offering use more of PayPal’s products.
Finally, Chriss suggested that he would meaningfully increase the company’s low prices going forward.
Over the longer term, I expect these initiatives, taken together, to enable the growth of PayPal’s top and bottom lines to meaningfully accelerate.
Plenty of runway for growth
There are other indications besides the low valuation of the shares which suggest that the name can advance a great deal.
First,the average price target of Street analysts on the stock is $71.48, meaningfully above its current price of around $65. Second, out of 35 analysts who cover the name, only 15 of them have “buy” ratings on the shares. As more of these analysts “see the light” and upgrade the shares, they are likely to rise meaningfully.
Finally, the shares have a low Relative Strength rating of 48 and an average Accumulation/Distribution rating of C, according to Investor’s Business Daily. These metrics indicate that the stock has underperformed in the last year, while institutions have not bought a great deal of its in the last 13 weeks. As many more investors realize that PayPal stock is a bargain ,the shares should rally a great deal.
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.
