The S&P 500 has set one new all-time high after another in 2024, but not every stock has participated in the current bull market. Some stocks remain beaten down, well below the highs reached in late 2021 and early 2022.
Some of the companies behind those stocks benefited from the behavior changes ushered in by the COVID-19 pandemic. But as things start to resemble the way things were pre-pandemic, they don’t look as attractive. Others, however, look oversold, and their current valuations don’t reflect their true potential.
One example of the latter is PayPal (PYPL). PayPal’s share price surged as COVID-19 drove more online and contactless sales. But a couple of bad quarters and a CEO change led to a massive sell-off in shares. The stock currently trades around 81% below the all-time high it reached in mid-2021. Here’s why it may be a great opportunity to buy up some shares.
It’s already showing signs of a turnaround
One of the biggest things weighing on PayPal over the past year was its declining active account total. Active accounts peaked in the fourth quarter of 2022 and experienced four consecutive sequential declines during 2023.
But active accounts increased in the first quarter, climbing 2 million to reach 427 million total. While there’s still a long way to go to get back to where it was at the end of 2022, the turnaround progress is encouraging.
The biggest driver of the active account decline was churn from inactive accounts in emerging markets in the Latin America and Asia Pacific regions. It’s now growing by adding users who are spending more and more frequently. Total payment volume was up 14% year over year despite fewer users than this time last year. Transactions per active account over the past year reached an all-time high of 60.
The virtuous cycle driving strong engagement growth
The growing engagement of PayPal users signals its network advantage. On one side of the network are consumers and on the other side are merchants. The massive consumer base using PayPal draws more merchants to accept the digital wallet and the growing number of merchants taking PayPal draws more consumers to the platform. A growing number of merchants also gives existing users more opportunities to use PayPal.
There’s good reason for merchants to choose PayPal, too. Not only does it add another payment option for around 400 million online shoppers, but it also makes them more likely to complete a transaction. The company reports a 33% increase in checkout conversions when the buyer uses PayPal versus another form of payment.
While PayPal faces competition, none of its competitors has a user base the size of PayPal. That makes it practically indispensable for online merchants.
That said, fierce competition can and has weighed on PayPal’s ability to charge higher fees for merchants. It also pushed the company to allow more consumer choice in its default payments, instead of forcing them to pay using methods more lucrative for the company (like cash balances).
Still, it’s hard to deny PayPal’s position as the leading digital wallet, putting it in a prime position for the continued secular growth in e-commerce.
The stock is an absolute bargain
The stock currently trades for a forward price-to-earnings ratio below 14x. That’s incredibly low, even if you expect competition to eat into its revenue growth and margins.
Management’s updated full-year 2024 guidance calls for mid- to high-single-digit earnings-per-share (EPS) growth. PayPal should be able to drive double-digit revenue growth as it returns to year-over-year active account growth this year. While non-branded checkout has weighed on its gross margin, it’s cutting costs in other areas, which should result in stable to growing operating margins. That could mean PayPal exceeds its current full-year outlook.
What’s more, PayPal is aggressively buying back shares at this price. It forecasts $5 billion in free cash flow, and management plans to repurchase even more than $5 billion in shares this year. That provides a further boost to earnings per share.
Wall Street analysts currently expect PayPal to grow its earnings per share at a compound annual rate of almost 16% over the next five years as a result of the above factors. So, with shares trading under 14x earnings, they present an incredible bargain for investors.
— Adam Levy
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Source: The Motley Fool