Although it's often forgotten, PayPal (PYPL 2.90%) is still a force to be reckoned with in the digital payments space. Despite the service's widespread use, the stock has been atrocious over the past few years, which has caused many shareholders to exit their positions.
However, a new arrangement may have given PayPal's stock the fuel it needs to head higher. So is PayPal worth buying here? Or is this deal just a distraction from something bigger going on? Let's find out.
PayPal's new deal with KKR should boost its future growth
On June 20, PayPal announced that it will sell KKR (KKR 0.71%) up to 40 billion euros ($44 billion U.S. dollars) in buy now, pay later loans from a handful of European countries. PayPal elaborated that this deal was already included in the guidance it gave investors during its Q1 earnings release but also indicated it would increase its share repurchases by an extra $1 billion.
So while PayPal's guidance isn't increasing because of this deal, we now have a better idea of how it will generate growth, something PayPal hasn't done well lately.
In Q1, PayPal's total payment volume rose 10% year over year, with revenue increasing at a 9% clip. For the rest of 2023, PayPal expects its revenues to grow from 6.5% to 7%, helped out by its latest deal with KKR.
In years when consumers are gaining confidence and using more buy now, pay later options, this will be a bigger boost for PayPal. It also underscores PayPal's commitment to being an asset-light fintech company that doesn't want to get into the lending business.
Still, 7% growth is slower than the market pace and may leave investors wanting more.
That's where its earnings growth kicks in. For 2023, PayPal expects its earnings per share (calculated according to generally accepted accounting principles or GAAP) to rise to $3.42, up 64% from last year's total. That values shares at just 20 times full-year estimates, an absurdly low price to pay for an asset-light fintech stock.
Furthermore, PayPal's cheap stock makes its share repurchases more effective. With PayPal's planned $5 billion in share repurchases for 2023, it should decrease shares outstanding by 5% once stock-based compensation is accounted for. If PayPal can continuously reduce its outstanding shares by 5% each year with an average of mid-teens earnings growth (Wall Street analysts predict 20% earnings growth in 2024), you've got a recipe for a dull but market-crushing stock.
PYPL Shares Outstanding data by YCharts
While that part sounds attractive, is there anything to be concerned about?
A leadership transition looms ahead
CEO Dan Schulman will be retiring from PayPal at the end of 2023, which is a huge concern for investors. While PayPal could make a home-run hire, it could also botch the job. Additionally, PayPal offered little news on the subject during its Q1 conference call.
Even though the year-end deadline is quickly approaching, I don't think it's something to be too concerned about. PayPal's business is in good shape and doesn't need a complete overhaul to run better. That's an attractive role to take over, and PayPal will likely find its target within the next couple of months.
With PayPal's stock valued at unheard-of levels for a mature fintech, it looks like a strong buy right here. Although it isn't as much of a growth name anymore, PayPal has become an outstanding value stock to balance out other highfliers in your portfolio.
