This Best Fintech Stock Is Just Too Cheap
After crushing the market for two years after the pandemic began in March 2020, PayPal Holdings‘ (PYPL -2.70%) the share price has fallen back to earth in dramatic fashion.
Fintech was a big winner as transactions migrated online amid the pandemic. But as economies reopened, money began to flow back into services and entertainment and slowed down online, forcing PayPal to reconsider its lofty long-term growth goals.
Since peaking in mid-2021, PayPal’s stock price has fallen over 75%, going from one of the hottest growth stocks to a deeply discounted value stock in less than a year. While PayPal may not be seeing the explosive growth rate it did just a couple of years ago, the fintech stock is ridiculously cheap and worth buying today. Here’s why.
PayPal’s dramatic repricing
PayPal was a big winner during the pandemic, when travel and entertainment spending ground to a halt and more consumers turned online to buy things. From 2020 to 2021, PayPal added 122 million new accounts, grew revenue by 43% and passed $1 trillion in total payment volume for the first time.
In February 2021, CEO Dan Schulman set high expectations for the company, including doubling its active accounts by 2025 to 750 million and doubling revenue and free cash flow. However, trends changed for the fintech, which revised its annual earnings expectations several times last year, resulting in a drastic repricing of the company.
After earnings fell 41% from 2021, PayPal’s stock trades at a price-to-earnings (P/E) ratio of 35.5, which is at the lower end of its historical average since it went public in 2015. Looking ahead, PayPal trades at a dirt-cheap valuation of 13.1, based on analysts’ expected earnings per share of $5.64 in 2023.
PYPL PE ratio data by YCharts. PE ratio = price-to-earnings ratio.
Things are looking up for fintech
PayPal ended 2022 with revenue growth of 8%, while its bottom line net income fell by 42%. The second quarter marked a low point for fintech as it posted its first net loss since 2014.
One thing that changed the trajectory of PayPal was activist investor Elliot Investment Management, which took a $2 billion stake to help turn things around. One of the first measures was to cut costs and focus only on high-conviction, high-margin opportunities.
Since then, it has returned to profitability. In the fourth quarter, revenues and earnings rose by 7% and 19%, respectively, from the previous year.
It has also shifted its focus from growing customer accounts to increasing transactions per active account (TPA). So while active account growth was just 2% in the fourth quarter, the company’s TPA was up 13% — a positive sign that its plan to increase activity among users is working.
Image source: PayPal Holdings. TPA = transactions per active account.
This tailwind makes fintech a no-brainer at today’s prices
Another thing working in PayPal’s favor is its top position as the most accepted digital wallet in North America and Europe. Among the 1,500 largest merchants in these regions, 79% accept PayPal’s digital wallet – a much higher acceptance rate than apple Pay and Alphabetits Google Pay.
Image source: PayPal Holdings.
According to a study by Juniper Research, digital wallet users are expected to exceed 5.2 billion globally by 2026, a growth of 53% from 2022. This changing consumer behavior should serve as another tailwind for fintech’s long-term growth.
PayPal is turning things around, and its long-term growth prospects and cheap valuations make it an exciting stock to buy today.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Courtney Carlsen has positions at Alphabet and Apple. The Motley Fool has positions in and recommends Alphabet, Apple and PayPal. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple, short April 2023 $70 puts on PayPal, and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.
