Recessionary concerns, a few lackluster quarters, overpromised and underdelivered projections, and a tech crash have absolutely crushed payment processing giant PayPal Holdings (PYPL -3.12%) this year. Shares are trading 67% lower than last year.
A drop like this is understandably concerning for investors, but there are several reasons it could also be a tremendous buying opportunity. Here's a closer look at why investing at today's rock-bottom prices is a genius move right now.
Making the right moves
The second quarter of 2022 was PayPal's first non-profitable quarter since its spinoff from eBay in 2015. Its earnings per share (EPS) fell to a loss of $0.29 per share from a gain of $1.01 last year, and its operating margin dropped by around 7%.
This loss wasn't because the company did less business -- in fact, revenue was 9% higher than last year. It was related to higher costs of borrowing and increased operational costs, as well as one-time charges from new products in PayPal's investment portfolio.
On the positive side, free cash flow was up 22% year over year. Payment transactions rose 16%, boosting total payment volume (TPV) by 9%. And PayPal is directly addressing the increased cost of borrowing and operating with targeted cost-saving measures. The company plans a $900 million cost-saving initiative that should help improve its bottom line.
The fintech company also has $15.6 billion in cash and cash equivalents, and only $13.6 billion in debt, including its latest round of issuance.
Recent upgrades mean prices are likely to rise
PayPal's focused moves to improve its operational costs have given analysts a fresh outlook on the stock, prompting those from Bank of America and Raymond James to upgrade their ratings on PayPal over the past few weeks. Share prices haven't jumped much in response, up just 1.5% from before the upgrades, but the analyst moves are a positive sign that investor confidence may also be returning. During that same time, the S&P 500 index was down 1.5%.
Cost savings alone are not going to be enough to rally PayPal's share price back to previous highs. That will take time. Short-term headwinds will likely impact the company if a recession unfolds, as many experts are predicting. But if we think long-term, its growth prospects still look promising.
PayPal was the first payment processing company in the world. Reinventing the services it offers its customers so it can adapt to new technologies and grow is nothing new. It has sufficient cash on hand to help it withstand a downturn, and today's pricing means that investors are in an excellent position to profit if the company does make strides toward recovery.
As a long-term, patient investor, I personally believe PayPal is a genius buy right now.
