Paypal (PYPL) $58 HOLD
Paypal took a beating of 8%, following lackluster results and guidance. Overall the stock has been a chronic underperformer with a negative 30% return in the last 5 years, and negative 24% in the past year. And this too in a booming market.
Most of the underperformance was because of overpricing, Paypal routinely fetched a P/E multiple of over 30, and a P/S ratio of over 6, in the Cathy Woods, buy everything tech, pandemic stimulus era. But with 5 year earnings and revenue growth slowing to the mid teens, the luster wore off, and in 2023, Paypal grew earnings by only 8% and recurring operating income by 11%.
What’s Ahead: In 2024, Adjusted EPS will be flat at $5.1 per share, while revenue is expected to grow 6.5%. Similarly 3 year forecasts are for only 7% revenue and earnings growth. Again, very mediocre growth.
Compared to its growth, Paypal is not unreasonably priced at 12X, Adjusted forward earnings ($60/5.1), and the PEG (Price Earnings / Growth) is 1.7 (12/7). Not that expensive. Block (earlier Square) (SQ) at $67, quotes 40x adjusted earnings, but grows faster at 30% – its PEG is actually lower at 1.33 (40/30)
In my opinion, Paypal’s stock could grow from here, the price is close to rock bottom, but the bigger problem is the whole payment processing sector is a commodity business, there is no product differentiation and Paypal has a lot of competition not just from Square, there’s Zelle, Stripe, Apple Pay and so on… the list gets bigger. It’s like the older, aging incumbent. Stock returns even from $58 could be just about the market average or we could get stuck in a value trap.
There is a new sheriff in town, let’s see how the new CEO Alex Chriss performs, and take another look next quarter.
