Some stocks have had it worse than others in the past few months. PayPal Holdings (PYPL 0.34%), among all, has truly had to bear the brunt of the stock market's chaos of late. News of interest rate hikes to squelch rising inflation and geopolitical concerns involving Russia and Ukraine have sparked negative sentiment around growth stocks, particularly companies in the technology sector.
The market is behaving especially irrationally toward PayPal -- the fintech juggernaut saw its share price decline more than 8% in one trading day on April 20. Likewise, the company's stock is down more than 60% in the past six months, quite alarming given the S&P 500 has dropped just 3% over the same period. With the stock well below $100 per share, long-term investors should think twice before passing up PayPal today. It's time to ignore the noise and focus on the fundamentals.
What's going on with PayPal?
In addition to battling macroeconomic headwinds and geopolitical uncertainty, PayPal issued a subpar forecast on its earnings conference call to wrap up 2021. Management expects revenue to only grow 6% year over year in the first quarter of 2022, to $6.4 billion. It is also forecasting a 29% decline in earnings from the same quarter a year ago, equal to an earning per share of $0.87. For full-year 2022, management is projecting challenges related to its replacement on eBay (EBAY -0.26%) costing it as much as $600 million in revenue. eBay, which spun off PayPal in 2015, is transitioning to its own payment platform.
But let's not overreact
There's no doubt management's projections are less than ideal, but investors shouldn't panic. Management is still forecasting its top-line to grow 15% to 17% in 2022, and total payment volume (TPV) is projected to expand more than 20% to about $1.5 trillion. Given PayPal's monstrous size, investors should be very pleased with this level of growth.
It also appears the eBay hardships won't last for much longer -- Dan Schulman, PayPal's chief executive officer, said the company plans to stop adjusting for eBay in the second half of 2022. Investors should be overjoyed with this news, as ex-eBay revenue growth has been consistently above 20%. It's easy to presume that PayPal's fundamentals are underwater considering the company's stock has recently lost over half of its value. But when you read between the lines, you'll notice that PayPal is indeed still in good condition, especially over the long run.
Let's not lose sight of PayPal's balance sheet and cash flow generation, either. The company's $16.3 billion in cash and investments grants it flexibility for future stock buybacks and business-enhancing acquisitions. PayPal also has a debt-to-equity ratio of only 45%, with the lack of leverage indicating PayPal is prepared for any economic situation. Cash is king, right? Well, PayPal is dominating in that domain as well -- the company grew free cash flow and cash from operations by 38% and 31% year over year in the fourth quarter, up to $1.6 billion and $1.8 billion, respectively.
I'll gladly pay the price for this stock
PayPal is trading at a bargain today. The company has a price-to-earnings multiple of 24, less than half its five-year average multiple of 54. PayPal is also trading at a steep markdown to industry peers Visa and Mastercard, which carry price-to-earnings multiples of 35 and 41 at the moment, respectively.
Analysts are forecasting 2023 EPS of $5.76 , meaning shares of the fintech behemoth are trading at just 16 times consensus earnings that year. The correction has gone too far with PayPal -- this stock is cheap, and it's hard to argue otherwise.
Sit back and watch this company recover
Canny investors should view the negative sentiment currently surrounding PayPal's stock as a buying signal. As the abandonment of cash gathers momentum, the demand for PayPal's wide array of payment services will likely increase. The company's long-term fundamental outlook remains largely unaltered despite what the recent plunge in its share price may suggest. And now PayPal's valuation looks more appealing than ever. It's time to add this fintech stock to your portfolio and watch your money grow in the years ahead.