There's little question that the surest path to long-term wealth generation is investing in the best companies out there and holding them for years, if not decades. That said, investing isn't for everyone and certainly isn't for the faint of heart. Case in point: the Nasdaq Composite index continues to tread water in a bear market, still down about 25% from its peak in late 2021.
Yet, history shows that every bear market is followed by a bull market. Savvy investors who keep their heads and invest in top-notch companies through the downturn will benefit when the market recovers -- which it inevitably will. In fact, analysts are remarkably bullish about the prospects of one beaten-down growth stock. If Wall Street is right, this stock is set to soar 113% over the coming year.
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This fintech innovator has fallen on hard times
As one of the original fintech pioneers, PayPal (PYPL -1.91%) provided consumers with a safe and effective way to pay at the dawn of internet retail, and in so doing became a household name. Since then, the company has done its level best to disrupt the payments industry. The payoff for its efforts appeared to come to a head with the onset of the pandemic, when digital payments became a necessity rather than a luxury and PayPal was at the head of its class.
However, the end of pandemic-related lockdowns, high inflation, and a broad market downturn have punished the former highflier. Low-income customers have cut spending, stunting PayPal's growth and helping fuel the ongoing pessimism. Net revenue of $27.6 billion grew just 10% in 2022, a far cry from the 25% growth it generated at the height of the pandemic. At the same time, net new active accounts grew just 2% last year, compared to 95% growth in 2020.
PayPal's slowing growth has spooked investors and the stock remains about 76% off its mid-2021 peak.
A rebound is on the horizon
PayPal has been crystal clear about its struggles and has been equally transparent about the steps it has taken to weather the macroeconomic storm.
Management embarked on a cost-cutting campaign that resulted in savings of $900 million in 2022 and earmarked $1.3 billion in cost reductions for 2023. In the fourth quarter, the company went even further, highlighting an additional $600 million in incremental savings for this year. The cuts include a headcount reduction, as well as a marked cuts in its real estate footprint. PayPal has also realized efficiency and productivity gains.
As a result of its efforts, management is now forecasting a return to more robust growth. Although the economic and currency exchange headwinds are expected to persist -- at least over the short term -- PayPal is forecasting first-quarter revenue growth of 9% in constant currency, resulting in adjusted earnings-per-share (EPS) growth of 24% at the midpoint of its guidance.
There's more. Late last year, PayPal launched an all-in-one mobile point-of-sale solution -- the PayPal Zettle Terminal -- expanding its entry into the small and medium-sized business market. The touchscreen terminal, with integrated Wi-Fi and cellular connectivity, is ready to go out of the box, with no need to pair with a smartphone or other electronic device. It not only processes payments, but also helps "manage sales, inventory, reporting, and payments, all in one place," according to the company. This is a direct assault on a market currently dominated by Block, with its Square card reader.
Furthermore, once the economy bounces back and low-income customers resume historical spending patterns, the digital payments industry will rebound, bringing PayPal along for the ride.
Wall Street is overwhelmingly bullish on PayPal
Wall Street believes the sell-fest has simply gone too far. Of the 44 analysts who cover PayPal, 32 rate it a buy or strong buy and not a single one recommends selling. Canaccord analyst Joseph Vafi is the most optimistic among his Wall Street peers, assigning a price target of $160 and a buy rating on the shares. This represents potential gains of 113% compared to Tuesday's closing price.
One area the analyst is particularly bullish about is PayPal's Pay with Venmo, which launched on Amazon late last year. Vafi posits that with roughly 55 million monthly active Venmo users in the U.S., the move will act as a catalyst, compelling other e-commerce platforms to accept Venmo as a payment choice -- thereby accelerating the pace of acceptance -- strengthening its network effect and pushing Venmo further into the mainstream.
If his research is on the mark, the stock could surge 113% over the coming 12 to 18 months, profiting PayPal shareholders along the way.
PayPal stock has never been cheap, but at roughly 3 times next year's sales, the valuation is far below its historical price-to-sales ratio of 7.6 times sales over the past five years.
With multiple catalysts to fuel its rebound, a deeply discounted stock price, and a strong endorsement from the Wall Street elite, now is likely a great time to buy PayPal in advance of a robust recovery to come.
