PayPal Holdings (PYPL 0.34%) has had a rough 2022 so far. Down 55% year to date, the global fintech leader's stock has gotten caught up in the broader retreat from tech stocks going on over the past year or so.
High inflation, rising interest rates, ongoing concerns about supply chains, rising gas prices, and a war in eastern Europe have all contributed to a shift to "safer" investments. Consequently, this has had an outweighed effect on richly priced technology companies, including PayPal. Also contributing to the price drop was some weaker-than-expected forward guidance from PayPal management. It said that unfriendly macro conditions and short-term company-related headwinds will likely lead to patchy growth rates this upcoming fiscal year.
In the long run, however, PayPal is firmly positioned to gain from the colossal shift toward cashless payments. Investors with extended time horizons should overlook the short-term noise and center on the endless potential that PayPal has over the long haul.
Image source: Getty Images.
PayPal's business is doing fine
After offering 2022 guidance that sent shockwaves throughout Wall Street, PayPal rebounded nicely by reporting in-line first-quarter results. Total sales grew 7.5% year over year to $6.5 billion, and non-GAAP earnings per share declined 27.9% to $0.88.
Total payment volume (TPV) climbed 13.1% to end at $323 billion, and the company added 2.4 million customers, bringing its total active accounts up to 429 million. The company's non-GAAP operating margin fell 107 basis points quarter over quarter to 20.7%, suggesting that the intensely competitive fintech market may be wearing away at PayPal's profitability.
In fiscal year 2022, analysts forecast PayPal's top line to increase 11.6% year over year to $28.3 billion and adjusted earnings per share (EPS) to retreat 15.4% to $3.89. The lower growth rates in 2022 can be largely attributed to eBay's transition to its own payment platform and adverse effects from macro conditions like high inflation.
Once unfavorable comparable metrics normalize and short-term headwinds ease, the narrative changes for the fintech leader. Next year, Wall Street analysts project PayPal's total sales to eclipse $33 billion, equal to 16.5% growth year over year, and its earnings per share to jump 24% to $4.83. Those are rock-solid growth rates for a business of PayPal's size. Although competition shouldn't be ignored, the company is advantageously positioned to sustain success.
Plus, the fintech juggernaut continues to strengthen its balance sheet and cash generation. Currently boasting $4.9 billion in cash and cash equivalents, the company generated $1.1 billion in free cash flow (FCF) in Q1, representing 16.2% of total sales. Over a five-year span, the mobile-payment enterprise has grown FCF at a compound annual growth rate (CAGR) of 16.9%. While we can expect PayPal to experience some growing pains in the near future, we shouldn't fuss too much because the company is well-equipped to ride out any storm.
Favorable valuation
The ongoing sell-off has made PayPal shares appear very cheap. At the moment, the fintech stock carries a forward price-to-earnings multiple of 22.5. This is a handsome valuation, considering that the stock has traded at an average price-to-earnings multiple of 57 in the past five years.
PYPL PE Ratio (Forward) data by YCharts.
Likewise, close competitors Visa and Mastercard trade at a respective 30 times and 34.5 times forward earnings today, so PayPal also looks inexpensive on a relative basis. Its current share price translates to less than 30% of its 52-week high, so I think investors are granted a strong margin of safety right now.
No-brainer investment today
PayPal remains an excellent play on the rapidly growing fintech arena. Sure, it doesn't offer the same potential for growth that some newcomers do, but the company is highly profitable and continues to generate cash at a rapid clip.
Serving as one of the largest digital wallets worldwide, PayPal provides investors a layer of security that most fintech companies simply don't. Go against the grain, and scoop up shares of this fintech behemoth today.
