Technology stocks have suffered a great deal in recent times. With inflation reaching 40-year highs, expected interest rate hikes, and global fear surrounding Russia and Ukraine, investor sentiment has been turned upside down.
Consequently, companies like PayPal (PYPL -1.14%), which is highly profitable and cash-flow positive, have been wrongfully treated of late. The fintech juggernaut is down more than 60% over the past year, a staggering decline compared to that of the S&P 500, which has gained 2% in the same time frame.
PayPal released first-quarter 2022 earnings on April 27 that should put to rest some skeptical views of the payment company. When considering PayPal's market positioning and commercial prospects over the long run, investors should feel very comfortable buying the stock at current levels. Short-term headwinds might continue to drag the company's share price down for the foreseeable future, but PayPal should recover nicely in the years ahead.
In moments like these, it's important to ignore the noise and focus on the fundamentals.
Image source: Getty Images.
What happened in the first quarter?
PayPal's first-quarter performance in 2022 should be positively interpreted by investors. The company reported a top line of $6.5 billion and $0.88 in earnings per share, largely in line with consensus estimates.
Total payment volume (TPV) in the quarter climbed 13% year over year to $323 billion. PayPal has continued to endure growing pains after eBay (EBAY 0.31%) dropped PayPal and transitions to its own payment splatform. Once the shift is complete, shareholders should start to see an uptick in growth. Ex-eBay revenue and TPV grew 15% and 17%, respectively, year over year in the first quarter. Per Chief Executive Officer Dan Schulman's guidance at the end of 2021, PayPal can expect to stop adjusting for eBay by the end of 2022.
Despite near-term obstacles, PayPal's outlook for the remainder of 2022 is solid. This year, analysts are projecting sales of $29.3 billion and $4.63 in earnings per share, implying 15% and 1% growth, respectively, year over year. Considering PayPal's mammoth size and the difficult pandemic-boosted comparables from a year ago, investors should be delighted with estimates.
And given the company's sturdy balance sheet and robust cash flow, PayPal offers investors a unique combination of stability and growth in a market swarming with uncertainty today.
PayPal trades at a bargain
Shrewd investors definitely love PayPal's valuation at the moment. The fintech titan is trading at about 24 times trailing earnings, representing a discount of more than 50% to its historical average price-to-earnings (P/E) multiple of 53. All gains made during the pandemic have been wiped away, and the company is now trading at its lowest valuation levels by far in at least five years.
PYPL P/E ratio. Data by YCharts.
Think about that for a moment. Does PayPal truly deserve to carry a lower valuation than it did a few years back? I wouldn't say so. Compared to 2019 figures, PayPal's fiscal-year 2022 forecast translates to a twofold increase in TPV, 65% growth in revenue, and 40% more active accounts. The numbers indicate that PayPal is in a better position now than it was several years ago, yet the stock is trading at a record low valuation. That's a pretty clear buy signal.
A no-brainer today
Technology investors are living in a buyers' market today. Some of the world's best companies are down significantly in the past few months due to nothing more than macroeconomic headwinds or subpar quarterly earnings. Prudent investors should view the negative sentiment surrounding the technology sector as a buying signal.
PayPal, which participates in a massive secular growth industry, is the most-accepted digital wallet in the world. As the war on cash continues, the demand for PayPal's services will only rise.
