Some stocks have fared worse than others over the past few months. PayPal Credits (NASDAQ: PYPL), of all, has really had to bear the brunt of the stock market chaos lately. News of interest rate hikes to stifle rising inflation and geopolitical concerns involving Russia and Ukraine sparked negative sentiment around growth stocks, especially tech companies.
The market is behaving particularly irrationally towards PayPal – the fintech juggernaut saw its share price drop more than 8% in one trading day on April 20. Similarly, the company’s stock is down more than 60% in the last six months, which is quite alarming given the S&P500 fell just 3% over the same period. With the stock well below $100 per share, long-term investors should think twice before ditching PayPal today. It’s time to ignore the noise and focus on the fundamentals.
What’s going on with PayPal?
In addition to battling macroeconomic headwinds and geopolitical uncertainty, PayPal issued a below-average forecast on its earnings conference call to wrap up 2021. Management expects revenue to grow only 6% year-over-year in the first quarter of 2022, to $6.4 billion. It also forecast a 29% drop in earnings from the same quarter a year ago, or earnings per share of $0.87. For the year 2022, management anticipates challenges related to its replacement on eBay (NASDAQ:EBAY), costing him up to $600 million in revenue. eBay, which split from PayPal in 2015, is moving to its own payment platform.
But let’s not overreact
There’s no doubt management’s projections are less than ideal, but investors shouldn’t panic. Management still expects its revenue to grow 15% to 17% in 2022, and total payment volume (TPV) is expected to grow more than 20% to around $1.5 trillion. Given PayPal’s monstrous size, investors should be very pleased with this level of growth.
It also looks like eBay’s troubles won’t last much longer – Dan Schulman, CEO of PayPal, said the company plans to stop adjusting to eBay in the second half of 2022. Investors should be pleased to this news, as the former eBay’s revenue growth has always been above 20%. It’s easy to assume that PayPal’s fundamentals are underwater given that the company’s stock recently lost more than half its value. But when you read between the lines, you’ll notice that PayPal is indeed still in good shape, especially over the long haul.
Let’s also not lose sight of PayPal’s balance sheet and cash generation. The company’s $16.3 billion in cash and investments gives it flexibility for future share buybacks and acquisitions that enhance the business. PayPal also has a leverage ratio of just 45%, with the lack of leverage indicating that PayPal is prepared for any economic situation. Cash is king, right? Well, PayPal dominates in this area too – the company increased its free cash flow and operating cash flow by 38% and 31% year over year in the fourth quarter, up to 1.6 billion. and $1.8 billion, respectively.
I will gladly pay the price for this stock
PayPal is trading at a bargain today. The company has a price-to-earnings multiple of 24, less than half of its five-year average multiple of 54. PayPal is also trading at a sharp decline against its industry peers. Visa and MasterCardwhich are currently showing price/earnings multiples of 35 and 41, respectively.
Analysts forecast 2023 EPS of $5.76, meaning the fintech giant’s shares are trading at just 16 times consensus earnings that year. The fix went overboard with PayPal – this stock is cheap, and it’s hard to argue otherwise.
Sit back and watch this business recover
Sophisticated investors should take the negative sentiment currently surrounding PayPal shares as a buy signal. As the move away from cash gains momentum, demand for PayPal’s wide array of payment services will likely increase. The company’s long-term fundamental outlook remains largely unchanged despite what its recent share price plunge may suggest. And now PayPal’s rating 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.
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Luke Meindl owns PayPal Holdings. The Motley Fool owns and recommends Mastercard, PayPal Holdings and Visa. The Motley Fool recommends eBay and recommends the following options: Short Calls April 2022 at $62.50 on eBay. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.