Some stocks have fared worse than others in recent months. PayPal Positions (PYPL -3.77% †, has really had to bear the brunt of the chaos in the stock market lately. News of interest rate hikes to quell rising inflation and geopolitical concerns over Russia and Ukraine have led to negative sentiment around growth stocks, especially companies in the technology sector.
The market is behaving particularly irrationally towards PayPal – the fintech juggernaut saw its share price drop more than 8% in a single trading day on April 20. Likewise, the company’s stock has fallen by more than 60% in the past six months, quite alarming given the S&P 500 fell by only 3% over the same period. With the stock well below $100 a share, long-term investors should think twice before skipping PayPal today. It’s time to ignore the noise and focus on the basics.
What’s going on with PayPal?
In addition to battling macroeconomic headwinds and geopolitical uncertainty, PayPal gave a subpar forecast at its earnings conference to wrap up 2021. Management expects revenue to grow just 6% year-over-year to $6.4 billion in the first quarter of 2022. It also forecasts a 29% decline in earnings from the same quarter a year ago, equating to earnings per share of $0.87. For the full year 2022, management projects challenges associated with its replacement eBay (EBAY -2.92% † it costs a whopping $600 million in revenue. eBay, which split from PayPal in 2015, is moving to its own payment platform.
But let’s not overreact
There is no doubt that management’s projections are not ideal, but investors should not panic. Management still forecasts revenue to grow 15% to 17% by 2022, and total payment volume (TPV) is expected to grow more than 20% to approximately $1.5 trillion. Given the monstrous size of PayPal, investors should be very happy with this level of growth.
It also looks like eBay’s troubles won’t last long — PayPal CEO Dan Schulman said the company plans to stop customizing for eBay in the second half of 2022. Investors should be overjoyed at this news, as ex- eBay sales growth has been consistently above 20%. It’s easy to assume that PayPal’s fundamentals are under water, as the company’s stock has recently lost more than half its value. But if you read between the lines, you’ll find that PayPal is indeed still in good shape, especially in the long run.
Also, let’s not lose sight of PayPal’s balance sheet and cash flow generation. The company’s $16.3 billion in cash and investments provides the company with flexibility for future share repurchases and business-enhancing acquisitions. PayPal also has a debt-to-equity ratio of only 45%, and the lack of leverage indicates that PayPal is prepared for any economic situation. Cash is king, right? Well, PayPal dominates in that area as well — the company grew 38% year-over-year and 31% year-over-year in the fourth quarter to $1.6 billion and $1.8 billion, respectively.
I will gladly pay the price for this share
PayPal is trading at a bargain today. The company has a price-to-earnings ratio of 24, less than half of the five-year average multiple of 54. PayPal is also trading at a sharp price cut against peers Visa and MasterCardwhich currently have P/E multiples of 35 and 41, respectively.
Analysts are forecasting 2023 earnings per share of $5.76, meaning the fintech giant’s shares will trade just 16 times the consensus earnings that year. The correction has gone too far with PayPal — this stock is cheap, and it’s hard to argue otherwise.
Sit back and watch this company recover
Canny investors should view the negative sentiment surrounding PayPal’s stock as a buy signal. As the abandonment of cash gains momentum, demand for PayPal’s wide range of payment services is likely to grow. The company’s long-term fundamental outlook remains largely unchanged, despite what the recent decline in its share price suggests. And now PayPal’s valuation looks more attractive than ever. It’s time to add this fintech stock to your portfolio and watch your money grow for years to come.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium consulting service from Motley Fool. We are fur! Questioning an investment thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.