What happened
It's been a little over a week since I warned investors -- ahead of PayPal's (PYPL 2.61%) fourth-quarter earnings report, I might add -- that this stock was far from cheap. Now that earnings are out, PayPal stock has plunged 25%, and some folks on Wall Street are questioning precisely how much PayPal is worth.
And PayPal stock has just closed down another 6.2% as of 3 p.m. ET.
Image source: Getty Images.
So what
In a quartet of reports that struck nothing but sour notes this morning, TheFly.com reported that:
- Barclays Bank has cut its price target on PayPal to $200.
- Needham & Co. cut its target to $166.
- Bernstein cut to $140.
- And DZ Bank delivered the cruelest cut of all, repricing PayPal to $140 and downgrading the stock to boot.
Bernstein recalls that Q4 was "perhaps one of the most disappointing quarters" for PayPal, reports TheFly, with the company only barely meeting sales expectations, missing earnings forecasts by one unattainable penny, and warning of a potentially huge earnings miss -- as bad as $0.65 per share -- in the coming year. PayPal earnings in 2022 will face "brutal" comparisons to the growth the fintech was able to post earlier in the pandemic, added Needham, and the "painful" loss of eBay as a partner is only making things worse.
Now what
Despite all the doom and gloom (and price-target cuts), both Barclays and Needham still hold out hopes for PayPal recovering to become a "long-term winner," however, and both banks maintain buy ratings on the shares as a result. Are they right to do so?
To find out, let's take a look at the latest numbers. Over the course of 2021, PayPal generated $5.4 billion in positive free cash flow (FCF), according to S&P Global Market Intelligence data. After its steep sell-off, all of PayPal now costs $146.6 billion in market capitalization -- or just $143 billion net of cash and debt. Divide FCF into that cash-adjusted market cap, and you end up with an enterprise value-to-free cash flow ratio of 26.5 on PayPal.
Now personally, for PayPal to qualify as a buy to me, I'd want to see the stock forecast to grow earnings at 26.5% or better, annually, over the next five years to justify that valuation. Instead, most analysts forecast growth rates of less than 16% for PayPal. For this reason, while I consider PayPal a lot cheaper than it was last week, it's still not cheap enough to qualify as a bargain in my book.
And until PayPal becomes an out-and-out bargain, I will not be a PayPal buyer.
