We recently came across a bullish thesis on PayPal Holdings, Inc. (PYPL) on ValueInvestorsClub. In this article we will summarize the bulls’ thesis on PYPL. PYPL shares were trading at closing price of $62 when this thesis was published.
PayPal Holdings, Inc. operates a technology platform that enables digital payments on behalf of merchants and consumers worldwide. It operates a two-sided network at scale that connects merchants and consumers that enables its customers to connect, transact, and send and receive payments through online and in person, as well as transfer and withdraw funds using various funding sources.
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The core business areas now show growth and profitability
PayPal, previously mismanaged under former CEO Shulman with a misguided strategy to become a ‘super app,’ is now under new leadership focused on a better strategy.
Shulman’s strategy led to stagnation in gross profit and unprofitable growth due to a focus on lower-quality customers and various non-core features. The core business areas, including PayPal’s branded checkout and Braintree, are now showing growth and profitability. Although overall gross profit has not increased in three years, recent exits of underperforming initiatives are expected to boost future performance.
Stock price of $80-90+ by 2026
New initiatives, such as the Fastlane product, which simplifies guest checkouts, could significantly enhance profitability by improving the net take rate. Currently, PayPal is undervalued with a low-teens GAAP earnings multiple, and has a solid financial position with a net cash balance and strong free cash flow yield. With ongoing buybacks and potential growth from Venmo and offline transactions, PayPal is positioned for future EPS growth, potentially reaching $6 by 2026 and a stock price of $80-90+.
PayPal also increased its free cash flow outlook from $5 billion to $6 billion. It now expects to buy back $6 billion worth of shares, up from prior guidance of at least $5 billion in share repurchases.
Transaction margin dollar best performance since 2021
The transaction margin dollars of $3.61 billion during the last quarter, which is nearly half the amount of its total revenue, increased 8%, “the best performance on that metric since 2021,” according to the company.
“We are stronger today than we were six months ago, and we will be stronger six months from now than we are today,” CEO Alex Chriss said in the earnings call.
PYPL is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 82 hedge fund portfolios held PYPL at the end of the first quarter which was 87 in the previous quarter. While we acknowledge the potential of PYPL as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as PYPL but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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