I came across a bullish thesis on PayPal on SA from Johnny Zhang. In this article, we discuss how PayPal faces growth challenges due to economic challenges and increased competition but its low valuation makes it appealing for long-term investors. PayPal shares were trading at $63.46 when this thesis was published, vs. closing price of $69.35 on September 11, 2024.
PayPal Holdings, Inc. is an American multinational company that facilitates online payment systems in the majority of countries that support online money transactions. It’s a smart alternative to paper transaction methods such as money orders and checks. The company was ranked as the 143rd of the Fortune 500 largest corporations by revenue in the United States. The company has been experiencing price pressures due to increased competition for the past two years leading to a fall in its take rate. The company now relies on total payment volume (TPV) expansion. PayPal’s action to cut non-transaction-related expenses has improved operating margins and topped revenue and EPS expectations in Q2 FY2024.
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Due to an economic slowdown, there was a reduction in payment volume growth. Despite the uncertain economic trends, there was an 8% YoY growth recorded in Q2 FY2024. While the company is focused on transaction revenue growth it aims to slightly increase non-transaction operating expenses to fund its growth opportunities. This action may result in a decrease in non-GAAP operating margin in Q3 FY2024. The company has not experienced a significant increase in its revenue although its non-GAAP Earning Per Share (EPS) increased by 36.2% YoY in the last quarter, surpassing analyst’s expectations by 20%.
PYPL’s GAAP P/E and P/OCF are at their five-year lows, suggesting that investors are currently undervaluing its earnings and cash flow growth. Considering the company’s FY2024 non-GAAP EPS guidance of “low to mid-teens,” the adjusted P/E sits around 15x, below Block, Inc.’s (SQ) 17.6x, making it highly attractive for long-term investors.
It’s currently trading at a low valuation, with both its P/E ratio and price-to-operating cash flow near their five-year lows. The undervaluation makes PYPL appealing to long-term investors especially after it introduced a share buyback plan worth $6B. Despite challenges, the company’s focus on margin growth and improving transaction revenue along with cost management seemed to be value propositions for investors showcasing PYPL as a value stock.
PYPL is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 87 hedge fund portfolios held PYPL at the end of the second quarter which was 82 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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