The COVID-19 pandemic situation and an uproar in demand for contactless payments drove digital payments giant PayPal Holdings (NASDAQ:PYPL) to its all-time high, touching $310.16 last year. However, with tightening government policies aimed to combat inflation and an uncertain macro environment curbing consumer spending trends, PayPal stock is now trading at its multi-year low near $69. Given its heavily discounted valuation, the stock makes a good investment choice which may handsomely pay back investors in the long term.
Based in California, PayPal Holdings operates a digital payments platform that allows its customers to send and receive payments across the world in over 100 currencies. Its payment solutions include PayPal, PayPal Credit, Braintree, Venmo, Xoom, iZettle, Hyperwallet Honey, Paidy, and other products.
Let’s take a deeper look at PayPal stock to see what makes it attractive.
Positive Spending Trends
According to recent Black Friday survey results by PYMNTS, PayPal continues to showcase supremacy over peers as the preferred payment option in both online shopping as well as in-store payments (not including credit and debit cards).
Over the big Black Friday weekend, 26.7% of shoppers made payments with PayPal. Specifically, the market share of Venmo payments doubled year-over-year to 8.2% compared to 4.1% in the prior-year period. In total, PayPal and Venmo reflected a whopping 34.9% share. Though Apple Pay and Google Pay both gained market share, their percentage share remained low at 12.7% and 10%, respectively.
PayPal’s Upbeat Q3 Results
On November 3, the company reported upbeat Q3 results topping both earnings and revenues expectations. Adjusted earnings of $1.08 per share easily beat analysts’ estimates of $0.98. However, the figure was 2.7% lower than last year’s figure of $1.11 per share.
Further, revenues jumped 11% year-over-year to $6.85 billion. Driving the revenues was 9% year-over-year growth in Total Payment Volume (TPV) to $337.0 billion, with a meaningful contribution from Venmo. Notably, 2.9 million net new accounts were added during the period despite a tough macro scenario. The company ended the quarter with 432 million active accounts. Customer engagement trends also remained healthy during the quarter.
PayPal’s core daily active accounts grew 40% compared to Q3FY2019 (pre-pandemic), growing at a CAGR of 11% over the past three years. What was more impressive was that the company raised its FY2022 EPS guidance to $4.07-$4.09 on the back of operating margin expansion and 9% revenue growth in Q4.
Venmo: Growth Driver for Future Profitability
Venmo is one of the most rapidly-growing mobile payment services among the various businesses PayPal owns. It has grown at a CAGR of 55% over the past three years (2018-2021) and is expected to be the leading growth driver for PayPal. During Q3, Venmo’s TPV grew 6% year-over-year to $64 billion.
Further, in October, Venmo and Amazon (NASDAQ:AMZN) inked a meaningful partnership. Through the collaboration, Venmo is now a payment option on Amazon. This implies that about 90 million active Venmo customers in the U.S. will have a new way to make payments on Amazon.
In addition, PYPL and Apple (NASDAQ:AAPL) are working together to improve PayPal and Venmo for users. Apple has fintech technology that can help PayPal, such as Tap to Pay on iPhone.
Compelling Valuation
In terms of its valuation, too, PayPal is extremely cheap. Currently, it’s trading at an attractive forward P/E ratio of 17x (based on 2022 estimates) compared to much higher multiples of its peer group. Payment processing giant (NYSE:MA) is trading at a forward P/E of 32.5x, while competitor Visa (NYSE:V) is trading at about 25x forward earnings when looking out to September 2023 estimates.
In addition, its current forward earnings valuation reflects a huge discount of 56% from its five-year average of 39x. This is an attractive discount and likely presents a great buying opportunity for a well-diversified global payments company with strong growth drivers.
Is PYPL Stock a Buy, According to Analysts?
The Wall Street community is clearly optimistic about the stock. Overall, the stock commands a Strong Buy consensus rating based on 21 Buys and seven Holds. PayPal’s average price target of $106.64 implies 55.7% upside potential from current levels.
Conclusion: PayPal Stock Looks Attractive
Investors remain worrisome about the impact on consumer spending as a result of an economic slowdown as well as sky-high inflation. Plus, there is a visible threat of competition and market share loss to new players in the market like ApplePay. Despite the concerns, the main metric, Total Payment Volume, which showcases the company’s strength, remains resilient.
The digital wallet industry will continue to grow, and PayPal, with its reach and diversified business model, should continue to grow, too, in the long run. Making the most of its depressed valuation, the company continues to make buybacks, repurchasing $3.2 billion year-to-date. In fact, it plans to buy an incremental $1 billion during the fourth quarter. Given its cheap valuation and strong business fundamentals, I believe PYPL presents a good buying opportunity.
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