PayPal Holdings (NASDAQ:PYPL) has had a prolonged growth of 1.07% YoY. PayPal stock has underperformed in the past few years compared to other competitors, facing intense competition in the digital payment market.
Despite that, I believe that PayPal stock should be a moderate buy for now due to its advancement in service features, substantial growth from Venmo and Braintree, and solid financial health. PayPal should be a buy, as I expect the stock’s fair value to reach up to $88.75, a 38.4% increase.
Catalysts for PayPal Stock
The company’s leading service is online money transfers. With the technology boom, the competition within the fintech industry is intense. PayPal’s main catalyst is its service improvements. In recent years, PayPal has continued introducing many service advancements to make online money transfers faster and more secure for its customers.
In the company’s recent news article, PayPal introduces six new features to improve the checkout process for customers, especially PayPal’s Fastlane.
Customers have to save their information once, and this new feature allows them to check out in one click without entering a password, credit card information, or additional information for future purchases.
Fastlane is determined to improve its customer experience by enhancing checkout and increasing merchant conversion rates. This feature has already proven its effectiveness by accelerating the checkout process by almost 40% compared to the old way.
Fastlane could attract customers and businesses of all sizes across different industries. Although Fastlane might not impressively increase PayPal’s customer growth, it still holds much potential for innovation and promising success.
Another catalyst for PayPal’s growth is the contribution of Braintree and Venmo’s customers. Both of those platforms help to diversify PayPal’s customer segments.
Venmo has become extremely popular among the younger population because of its ease of use and peer-to-peer payments. There is still more room for expansion in Venmo’s domestic and international customer segments. In Q1 2024, Venmo had a total payment volume of $69 billion, contributing to the growth of PayPal’s TPV.
Moreover, Braintree has contributed 13% of the transaction growth and 9% of the revenue growth for PayPal. The potential development of these two platforms is critical to accelerating PayPal’s growth.
Also, I believe that with the new CEO, Alex Chriss, coming into the office, his new management can offer PayPal a sustainable growth plan in the future.
Valuation
Overall, PayPal presents solid financial health. Its revenue grows consistently over the year, with an 8.2% increase for FY2023. In Q1 2024, the company experienced a 14% increase in total payment volume.
Its active accounts are 427 million for Q1 2024. In my opinion, these metrics indicate PayPal’s substantial position in the global digital payments market. Also, PayPal generates positive free cash flow across quarters.
In Q1 2024, the company’s FCF was $1.8 billion. The strong cash flows suggest that PayPal’s operation is very efficient, managing its capital expenditures effectively.
The WACC is calculated based on a beta of 1.42 and a cost of equity of 10.93%. We then discount the forecast cash flow using the WACC of 9.8% and the terminal value of 3%. PayPal’s equity value per share is predicted to be $88.75, a 38.4% upside from the company’s current price of $64.10.
Risk
PayPal’s underperformance in the past few years is mainly because of fierce competition with competitors such as Stripe, Apple Pay, and Alphabet’s Google Pay. The digital payment market is becoming more intense as big firms enter the industry.
Also, it’s hard to distinguish PayPal from other competitors since they all provide the same service – online payment. Therefore, convenient and secure payment is the only way to gain customers.
I believe PayPal must consistently enhance its payment features and improve customer experience to gain market share and accelerate its growth.
Another possible risk for PayPal is its security. Since it’s a financial technology company, PayPal has many risks related to customers’ privacy and card information. PayPal’s security payment is crucial for customers.
The company must secure its online payment and money transfer services to protect customers’ information. In my opinion, failure to enhance it will negatively impact PayPal’s growth.
The Bottom Line on PayPal Stock
In conclusion, PayPal is worth investors’ attention due to its advancement in service features and supportive growth from Venmo and Braintree. Moreover, the company presents a robust free cash flow and maintains a solid user base across the quarters.
Those metrics indicate the company could have the capabilities to sustain future growth. However, PayPal’s risks include fierce competition and security issues. The company’s ability to enhance its market position and upgrade its customers’ experiences will justify its growth.
PayPal stock warrants a buy with an upside of 38.4%, reaching up to $88.75 per share from the current price of $64.10.
On the date of publication, Michael Que 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.
The researchers contributing to this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
