Buy Dip on This Fintech Stock During Nasdaq Bear Market?

The war on cash, a phrase that refers to the shift from physical currency to digital payments, is in full swing. By 2030, the mobile payments market is expected to reach $588 billion, representing a compound annual growth rate (CAGR) of 35.3% from 2022, according to Grand View Research. Understanding the secular trend, wise investors should be very intrigued after watching Nasdaq Composite fell 21% since the turn of the year.

With many financial technology (fintech) stocks now trading at record lows, long-term investors have many promising buying opportunities. One company in particular, PayPal Holdings (PYPL 2.35%), has caught my attention lately. The fintech giant is not only highly profitable and cash flow positive, but it also commands 50.3% of the electronic payment processing environment. And despite its top position in a massive secular growth market, the company has lost 53% of its value so far this year.

Let’s dive into PayPal’s situation and find out if it’s a smart investment right now.

Image source: Getty Images.

What’s new for PayPal?

On July 27, PayPal’s stock surged more than 10% after news emerged that an activist investor, Elliott Management, has been steadily accumulating the stock. It is suspected that the investment firm plans to take a large stake in the company so that it can speed up PayPal’s cost-cutting measures. While this could be interpreted as positive news for the mobile payment company, I would rather focus on the underlying fundamentals of the business.

According to its first-quarter earnings report, the company’s total sales grew 7.5% year-over-year to $6.5 billion, and its diluted earnings per share jumped 27.9% to close at $0.88. Typical of many fintech companies today, management cited a number of reasons why growth is slowing, notably softness in e-commerce, eBay‘s (EBAY 0.64%) continued transition to a separate payment platform, and ongoing inflation that dampens consumer spending.

In terms of other key figures, PayPal’s total payment volume (TPV) increased 13.1% to $323.0 billion, and it added 2.4 million new accounts during the quarter to bring the total to 429 million.

Investors should anticipate a bumpy ride for the rest of 2022 — Wall Street analysts forecast the company’s total revenue to rise 11.1% year-over-year, up to $28.2 billion, and earnings per share to fall 16, 3% to $3.85. However, the narrative should improve next year, with analysts projecting top- and bottom-line growth of 16% and 23.1%, respectively. PayPal is to publish its earnings report for the second quarter today.

Do I recommend buying PayPal today?

For several reasons, I encourage investors to consider buying PayPal stock right now. First, unlike much of its competition, the company has proven to be extremely profitable and cash flow positive, generating $1.1 billion in free cash flow (FCF) in the first quarter alone. Second, PayPal is a dominant force in a fast-growing market, and the company continues to diversify its business with offerings such as peer-to-peer payment platform Venmo and a buy-now, pay-later option. Finally, the stock currently has a price-to-earnings multiple of around 29, a steep discount to its five-year average of more than 57.

It’s clear that many investors have temporarily fallen in love with this fintech juggernaut, but that doesn’t mean prudent investors should shy away today.