For years, PayPal (PYPL -1.91%) was synonymous with online payment processing. However, that space has become increasingly crowded thanks to rising competition. Additionally, PayPal seems to have transitioned from a growth to a value stock, confusing investors on how they should view the company.
Because of this transition, PayPal's stock is incredibly cheap, leaving an excellent opportunity for investors to pick up shares at a reasonable valuation. Read on to discover why now could be a once-in-a-decade buying opportunity for PayPal stock.
PayPal is starting to become more profitable
As PayPal transitions from a growth to a value designation, it will also experience a leadership change. President and CEO Dan Schulman will retire at the end of 2023 and will stay on to ensure a smooth transition to the next CEO. Schulman led the stock to outpace the S&P 500 for most of his career after PayPal was spun off from eBay in July 2015, but blunders in 2021 caused those gains to fall away.
PYPL Total Return Level data by YCharts
New blood can hopefully reinvigorate the stock because there's a lot of potential with PayPal.
In the fourth quarter, revenue was only up 7% over last year, but earnings per share (EPS) rose 19%. This means PayPal is becoming more efficient and making greater profits off smaller revenue growth. While you may think this model won't work, it's precisely what Apple has done in its rise to become the world's largest company by market cap.
This trend is expected to continue throughout 2023, with full-year EPS expected to rise 56% to $3.27, on Wall Street-estimated revenue growth of 7%.
With that expected earnings growth, investors should consider using a forward price-to-earnings (P/E) ratio, which utilizes earnings projections instead of trailing earnings. This method can be faulty because you're not valuing the company on established facts. But when a company is experiencing significant earnings growth, it's a helpful metric. By examining PayPal through this lens, the stock looks incredibly cheap, especially when compared to its historical trailing P/E multiple.
PYPL PE Ratio data by YCharts
With PayPal's forward valuation below 16 times forward earnings, it's well below the S&P 500's trailing P/E ratio of 21.5, meaning PayPal is one of the lower-valued companies within that index.
With PayPal rapidly growing earnings and cheaply valued, the stock looks attractive, but could a new challenger derail its current trajectory?
Large banks are launching a digital wallet
It was recently reported that major banks, including Wells Fargo, JPMorgan Chase, and Bank of America, have been developing a digital wallet that would be a direct competitor to PayPal. While it's a smart idea for the banks to do this, the effort is likely too little, too late.
PayPal (and other digital wallets like Apple Pay) have already established a strong customer following. Unless these wallets offer a game-changing feature, it's likely to be another offering in a crowded space. While this is something to watch, management didn't even mention it on PayPal's Q4 earnings call.
Schulman has done a lot of good for PayPal, but the transition to new leadership should boost the stock, especially if the board makes an all-star hire. Combine that with rapidly growing earnings and a cheap stock, and you have a recipe for solid stock price appreciation.
In the future, the bar for PayPal will be to beat the S&P 500 by a few percentage points over the long term. If it can do that, it will be a successful investment. I'm confident this will happen, so I'm a buyer of shares.
