PayPal (PYPL 0.09%) shareholders have experienced the best and worst in just a few short years. The fintech juggernaut rallied more than 200% from the start of the pandemic through September 2021. Much has changed since then -- PayPal shares are down 63% in the past six months versus a 1.9% decline in the S&P 500. The sell-off can be attributed to a variety of factors, most notably rising interest rates that continue to exert pressure on tech stocks. More recently, the Russia-Ukraine war and a disappointing 2022 forecast have stoked further concerns.
PayPal's steep pullback grabbed my attention from the start -- how does the world's largest mobile payments company shed over half of its value in such a short period of time? In conducting my due diligence, I have concluded that PayPal's recent struggles stem from headwinds that are primarily short-term in nature. The company's long-term commercial prospects remain intact, and as a result, investors are presented with a golden buying opportunity. Let us now turn to three reasons investors should consider adding PayPal to their portfolios today.
Image source: Getty Images.
1. World-class fintech moat
PayPal has built a reputation as a safe and reliable mobile payments enterprise. Available at checkout for 76% of the 1,500 largest retailers, PayPal is the most accepted digital wallet across North America and Europe. Apple Pay (AAPL 0.78%), which is only available at 27% of the same merchants, is a very distant runner-up.
According to Statista, PayPal controls more than 50% of the global payment processing software industry. Boasting 426 million active accounts, the company eclipsed $1 trillion in total payment volume (TPV) for the first time ever in 2021, climbing 33% year over year to $1.3 trillion. There are no signs of slowing down, either -- management is projecting as much as 22% in TPV growth for 2022.
For PayPal, the proof is in the pudding. Despite its mammoth size, the company continues to expand its reach and operations into different segments. As the war on cash continues to heat up, PayPal is well positioned to remain a market leader in the years ahead.
2. Consistent financials combined with massive market potential
PayPal's fundamentals look awfully strong for a company that has lost over half of its value this past year. The company finished 2021 with $25.4 billion in sales and adjusted earnings per share (EPS) of $4.60, translating to 18% and 19% growth year over year, respectively. The fintech leader continues to shine on the cash flow front -- PayPal's free cash flow and cash from operations grew 38% and 31% in the fourth quarter, respectively, up to $1.6 billion and $1.8 billion. Given its $5.2 billion cash position and debt-to-equity ratio of only 45%, the company's balance sheet appears to be in excellent condition.
The future is bright for the fintech arena as well. Dan Schulman, the company's chief executive officer, estimates that the digital payments industry will evolve into a $100 trillion market in the future. PayPal investors should be grinning ear to ear when learning this news given the company's strong brand image and elite market positioning.
3. Attractive valuation
The latest sell-off has made PayPal's share price extremely appealing. The company is trading at about 29 times earnings today, a little more than half its five-year average price-to-earnings multiple of 54. PayPal's valuation currently lies well below pre-pandemic levels despite all of the milestones it has achieved during the past couple of years.
PYPL PE Ratio data by YCharts
PayPal's price-to-earnings multiple is also cheap compared to close competitors like Visa, Mastercard, and Block, which currently trade at 35, 41, and 368 times earnings, respectively.
I'm giving the green light on PayPal
PayPal represents a tremendous buying opportunity right now. The company provides investors with a nice combination of value and growth at current levels. It also sits at the epicenter of a massive secular growth industry. Short-term headwinds may continue to influence PayPal's share price for the foreseeable future; however, long-term investors should feel confident that this stock will recover nicely over time.
