Down 48%, should investors buy and hold PayPal for 5 years?

Pioneer for mobile payment PayPal Holdings (PYPL 0.41%) has returned to earth after rising to all-time highs in the thick of the pandemic. The share price has fallen 48% since the start of 2022 in light of a slowdown in growth and increased turbulence from high inflation and the Fed’s interest rate hikes. But given that the financial technology (fintech) juggernaut controls 50.3% of the global online payment processing industry according to a report citing calculations from Statista, now might be a good time to give the company a solid look.

The war on cash, which refers to the shift away from physical currency in favor of digital payments, is well underway, and PayPal is advantageously positioned to benefit significantly from the secular trend. According to Grand View Research, the global digital payments market is projected to rise at a compound annual growth rate (CAGR) of 20.5% through 2030. Knowing that long-term investors should be unfazed by short-term headwinds and zero in on the long-term trajectory of PayPal’s business.

On that note, let’s examine PayPal’s current situation to help investors decide if it’s a stock worth adding to their portfolios today.

Image source: Getty Images.

Dissecting PayPal’s business

On Aug. 2, the fintech leader released a second-quarter earnings update that eased many investors’ concerns about the company’s future, sparking a much-needed boost in its share price. Total revenue rose 9.1% year over year to $6.8 billion, in line with Wall Street estimates, and its adjusted earnings per share fell 19.1% to $0.93, but easily beat consensus forecasts with 6.6%. The company also added 35 million active accounts to bring the total up to 429 million, and total payment volume (TPV) grew 9.3% to $339.8 billion.

The decline in growth can be attributed to a number of different factors. Not just is eBay‘s (EBAY -1.54%) transition away from PayPal putting pressure on the fintech giant’s top line, but high inflation and a general softness in e-commerce compared to a year ago are causing temporary growing pains. For the full year, Wall Street analysts expect total revenue to rise 9.8% year-over-year to $27.9 billion and earnings per share to fall 14.8% to $3.92. In fiscal 2023, which is when year-over-year comparables will normalize, the Street calls for top- and bottom-line growth of 14.3% and 22.7%, respectively.

In the long term, the fintech leader should be in good shape. If it can expand its top line at a CAGR of 10% from fiscal 2021 to 2025, it will generate approximately $41.0 billion in annual revenue. With a margin before interest, taxes, depreciation and amortization (EBITDA) of 21%, which is in line with last year, PayPal’s EBITDA figure will be $8.6 billion. Assuming an enterprise value-to-EBITDA multiple of 30, which is below its 5-year average of 42.4, the company’s enterprise value would be $258.3 billion, or 124% higher than $115.5 billion right now.

Is it time to buy shares in PayPal?

PayPal’s retreat so far in 2022 has created an excellent buying opportunity for investors, especially when factoring in the rising fintech arena. Growth may be patchy for the foreseeable future, but most of the challenges the company faces today are short-term. Going forward, I feel confident that the fintech leader will experience a healthy rebound and continue to reward shareholders with robust gains. At current valuation levels, PayPal appears to be a no-brainer buy for patient, long-term investors.