As the interest in AI (artificial intelligence) ramps up, old trends like cybersecurity, fintech, or the metaverse take a backseat unless they also have AI aspirations. With investors shifting their capital from one idea to the next, a few bargains are starting to appear.
PayPal (PYPL -1.19%) is one of them, as the company is still steadily growing and rapidly increasing its profitability. Still, the stock has received no love and is down more than 10% in 2023, while many other tech stocks are up over 20%. So is PayPal due for a rally? Or is something else going on here? Let's find out.
PayPal is no longer the growth machine it used to be
PayPal has been around for a long time and was one of the primary digital payment processors as the internet hit the mainstream. Now, it has been pushed aside in favor of companies creating their own payment-processing platforms and consumers using digital wallets native to their cellphone operating systems. Furthermore, PayPal lost its exclusive payment processing partnership with eBay, which has affected PayPal's payment streams.
With PayPal getting stuck between these two trends, many investors are worried about its future. However, judging by PayPal's massive growth in unbranded processing in 2022, the company seems to be finding a niche it excels in while the rest of the company slowly grows.
Image source: PayPal.
Still, 13% payment volume growth in 2022 isn't anything to complain about. In Q1 of 2023, PayPal delivered a similar result, growing its total payment volume by 10%. This allowed revenue to increase by 9%, which is not bad considering the economic environment. However, the future looks less promising, as PayPal expects 6.5% to 7% revenue growth for 2023.
But that's looking at PayPal through the old, growth-oriented lens. Market-crushing growth likely isn't going to come from PayPal anymore; it's now an earnings growth game.
From that standpoint, PayPal is excelling.
Where PayPal's earnings increase comes from
In Q1, PayPal's earnings rose an outstanding 61% to $0.70 per share. PayPal also reiterated that this trend will continue in 2023, with management expecting to generate $3.42 per share versus $2.09 per share last year, a 64% increase.
This massive earnings increase is powered by two factors: share buybacks and efficiency gains.
In Q1, PayPal repurchased about $1.4 billion in shares and has repurchased 48 million shares for $4.1 billion over the past 12 months. At PayPal's current $70 billion market cap, those repurchases represented about 6% of the company. That's a lot of bang for management's buck, and with another $4 billion in repurchases planned for 2023, that will make a significant dent in the share count.
By dropping the share count, the denominator in the earnings per share metric falls, which increases how much money PayPal makes per share.
In the numerator, PayPal is helping its metrics by reducing operating expenses.
| Line Item | Q1 2023 | Q1 2022 | Percent Increase |
|---|---|---|---|
| Sales and marketing | $436 million | $594 million | (27%) |
| Technology and development | $721 million | $815 million | (12%) |
| General and administrative | $507 million | $607 million | (17%) |
Data source: PayPal.
This increased PayPal's operating income by 41% in Q1, a move many shareholders would applaud.
However, the stock isn't getting any respect. Although it trades at 27 times trailing earnings, this doesn't factor in PayPal's massive earnings increase over the next 12 months. When that is accounted for, PayPal's stock trades at a dirt cheap 13 times forward earnings.
PYPL PE Ratio (Forward) data by YCharts
At these prices, PayPal can be considered a value stock, although it is still growing. I think investors should consider PayPal's stock here, as it provides some value in a market full of overvalued stocks.
