We recently compiled a list of the 10 Best Undervalued Stocks To Buy Now. In this article, we are going to take a look at where PayPal Holdings, Inc. (NASDAQ:PYPL) stands against the other undervalued stocks.
Demographic Shifts and AI Innovation: A Bullish Case For the US Market
In the prior couple of years, experts and analysts were worried about a recession in the US and their best-case scenario was a soft landing. Experts are still predicting the latter. However, 2024 has proven to be quite a healthy year for the US stock market as it recently hit new highs on the back of technology stocks. Moreover, we also saw notable market broadening in the latest earnings season. However, Co-Founder and Head of Research at Fundstrat Global Advisors, Tom Lee is not just bullish on the current year but also sees the US stock market almost tripling by the end of the decade.
On June 26, Lee told CNBC that he believes the S&P 500 could reach 15,000, driven by a combination of demographic trends and technological advancements. He compared today’s market to past periods of rapid growth, such as the 1920s and the 1950s-1960s. He credits the potential surge to an increase in the population of prime-age adults (30 to 50 years old), which is now led by Millennials and Gen Z. As these generations enter their peak earning years, their borrowing and spending are set to increase, and they are going to take major life decisions which are expected to drive economic growth.
In addition to these demographic factors, Lee highlights the transformative impact of artificial intelligence (AI) on the economy. He believes that AI presents a significant opportunity for US technology companies, especially as it addresses a global labor shortage by converting labor costs into technological solutions, which would probably boost the US tech sector revenues. Furthermore, the US, with its leading technology sector, is well-positioned to attract substantial global investment, especially as we see that other regions like China and Germany face demographic and economic challenges.
Despite Tom Lee’s optimism, he acknowledged several risks to his bullish outlook. He said that a global recession could undermine growth, and the development of AI could also backfire or cause geopolitical instability. Additionally, there is the potential for the stock market to peak prematurely, forming a bubble.
Despite the risks, Tom Lee predicts an optimistic outlook for the US market in the current decade. Based on his insights, this could be an ideal time to invest in the market for the longer term. Keeping in mind that Lee predicts good things for the future of AI, you can take a look at the 10 Best Artificial Intelligence Stocks to Buy Under $10.
Our Methodology
For this article, we identified over 40 stocks that were considered undervalued by other financial media websites. From that list, we narrowed our choices to 10 stocks whose forward PE ratio was either equal to or below 15 or was below their industry average, as of June 24. We listed the stocks according to their hedge fund sentiment, which was taken from our database of 920 elite hedge funds as of Q1 of 2024.
Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A consumer in a cafe paying for goods using a mobile payment app.
PayPal Holdings, Inc. (NASDAQ:PYPL)
Forward PE as of June 24: 15
Number of Hedge Fund Holders: 82
PayPal Holdings, Inc. (NASDAQ:PYPL) is a prominent digital payments company that facilitates online money transfers. Over the recent years, the company has fallen out of favor for several analysts due to competition concerns and some suboptimal capital allocation decisions by the previous CEO. However, things seem to be turning around under its new CEO, Alex Chriss. Alex Chriss and the CFO, Jamie Miller provided an optimistic outlook for the company based on recent performance and strategic initiatives at the company’s latest earnings call. PayPal Holdings, Inc.’s strong Q1 performance, strategic focus on innovation, market expansion, and operational efficiency, along with positive financial metrics and strategic investments could make the company attractive to investors. In addition, the company is down over 80% from its all-time high, which brings it to an attractive valuation.
PayPal’s latest strategic initiatives toward market expansion could also be beneficial for investors. PayPal Holdings, Inc.’s PayPal Complete Payments (PPCP) platform is gaining momentum and is now available in over 34 countries, including recent expansions to Canada, the U.K., and 20 European markets. With approximately 7% of the small and medium-sized business (SMB) volume already on PPCP, the platform is set to enhance merchant and consumer experiences through improved branded checkout integration.
On top of that, Venmo continues to be a key growth driver for PayPal Holdings, Inc. (NASDAQ:PYPL), with a 21% year-over-year increase in consumers using the Venmo debit card. The focus on increasing balance-funded P2P senders, which grew by 17% in Q1, contributes to overall transaction margin dollar growth. Additionally, PayPal is reinvigorating its remittance business, Xoom, by refining products and implementing a customizable pricing model, as it aims to reverse the negative revenue trajectory.
PayPal Holdings, Inc. (NASDAQ:PYPL) is trading at 15 times its forward earnings, a 55% discount to its historical 5-year average. We said that Cramer recommends Holding PYPL, in our article about Jim Cramer’s Latest Portfolio, but analysts hold a consensus Buy opinion. The company is expected to grow its EPS by 11% this year, and when considering its new product growth strategy and upcoming catalysts, PYPL is worth looking further into at current levels.
PayPal Holdings, Inc. (NASDAQ:PYPL) was part of 82 hedge funds’ portfolios in the first quarter with a total stake value of $4.2 billion. Citadel Investment Group is the biggest shareholder in the company and has a position worth $581.145 million as of Q1.
ClearBridge All Cap Growth Strategy stated the following regarding PayPal Holdings, Inc. (NASDAQ:PYPL) in its first quarter 2024 investor letter:
“We were also active in adding to stable bucket investments PayPal Holdings, Inc. (NASDAQ:PYPL) and UnitedHealth Group where negative near-term sentiment led to more attractive risk/reward profiles. We added to electronic payments provider PayPal as we have growing confidence that new CEO Alex Chriss’s strategic focus areas can improve the company’s performance, particularly in the key branded business.”
Overall PYPL ranks 1st on our list of the best undervalued stocks to buy. You can visit 10 Best Undervalued Stocks To Buy Now to see the other undervalued stocks that are on hedge funds’ radar. While we acknowledge the potential of PYPL as an investment, our conviction lies in the belief that 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 more promising than PYPL but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.