Long-term growth investors are probably looking at the current state of the stock market with mixed emotions. The past six months have seen some of the world's most dominant companies struggle as part of a broader tech sell-off related to high inflation, rising interest rates, and ongoing concerns surrounding Russia and Ukraine. There's likely some trepidation about shrunken portfolios. But the investors are also likely to see some incredible opportunities.
One company caught up in the sell-off, PayPal Holdings (PYPL -0.05%), has seen its stock price sink 70% from all-time highs set last summer. The company has faced some growing pains in regards to challenges related to the end of its partnership with eBay (EBAY 1.32%), but its long-term commercial prospects remain largely unaffected.
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Undoubtedly one of the world's premier fintech enterprises, PayPal boasts a 50% share of the global payment processing software industry. The company continues to sustain robust growth, enjoys an exceptional balance sheet, and has significantly enhanced its cash flow generation in recent years. PayPal is a no-brainer today for investors looking for a solid combination of growth and value.
Do what good investors do -- ignore the short-term noise and focus on the underlying fundamentals that make PayPal a value play.
What's going on with PayPal financially?
The company provided weaker-than-expected guidance for 2022 in its earnings call to wrap up 2021. This added to the negative sentiment surrounding the stock, as many investors expressed concern that the fintech juggernaut would be unable to satisfy future expectations. Some of the pessimism was erased when PayPal released its first-quarter earnings report on April 27.
With many investors expecting the worst, the company reported a top line of $6.5 billion and a bottom line of $0.88 per share, largely in line with Wall Street's expectations. Total payment volume for the quarter also increased 13% year over year, up to $323 billion. Growth is projected to unwind in 2022 predominantly due to eBay's transition to its own payment platform, with management forecasting the shift to place up to $600 million of pressure on revenue this year.
Even so, the company is still in great shape -- analysts are modeling for sales of $28.6 billion for 2022, equal to a 13% increase year over year. Non-eBay revenue growth has been consistently above 20%, suggesting the company is well-positioned to experience robust expansion once the transition is finished. PayPal's growth is greatly complemented by its sturdy balance sheet and cash flow generation. With $4.9 billion in cash and a debt-to-equity ratio of 50%, the company has a considerable amount of financial flexibility to allow for business-enhancing activities in the future. Cash continues to pour in as well, with the company enjoying a five-year free cash flow compound annual growth rate (CAGR) of 17%.
PayPal looks like a value stock today
The sell-off has left PayPal shares at their cheapest valuation ever. The stock is trading at 26 times earnings today, representing a 75% discount to its historical average price-to-earnings multiple of 57.
PYPL PE Ratio data by YCharts
Not only have all gains made during the pandemic been erased, the stock has never traded at these levels since spinning off from eBay in 2016. That brings up the question: Does PayPal truly deserve to be priced at all-time low levels? The numbers wouldn't say so. Per management's guidance for 2022, the company is expecting total payment volume (TPV) to double, revenue to be 1.5 times higher, and active accounts to be up 40% from 2019 figures. So while growth is forecast to ease this upcoming year, it's quite clear that PayPal is a stronger company now than it was prior to the pandemic. Hence, the stock is looking awfully cheap at current levels.
Safe and smart investment today
Contrary to what its share price may suggest, investors should feel comfortable putting their money into PayPal today. As a world-leading fintech, the company is sure to benefit in the future as the war on cash gains more momentum. And given that PayPal is trading at a record low valuation, now might be the optimal time to scoop up shares of the stock.
