Some companies' stock prices underperform for years before the market eventually warms up to them. This is because of the emotion of fear, which can cloud investors' judgment.
In recent years, PayPal (PYPL 2.90%) has fit this profile. A $10,000 investment in the company made in 2016 would now be worth $19,000. This lags the $25,000 that the same investment in the S&P 500 index would be valued at today with dividends reinvested. Let's dig into what could make PayPal a no-brainer investment.
Operating in a thriving industry
The outlook for the global digital payment market is promising. Economic growth in emerging markets is leading more people than ever before into the global middle class. This brings with it the disposable income for smartphones and e-commerce purchases, which are, in part, carried out by the likes of PayPal and its payment network. That is precisely why the market research company Markets and Markets believes the global digital payment industry could grow from $88.1 billion in 2021 to $180.2 billion by 2026.
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PayPal's fundamentals tell a different story from stock performance
Processing nearly $1.4 trillion in payments volume on both the consumer and merchant side in more than 200 global markets in 2022, PayPal is the leading player in the digital payments industry. Along with this industry leadership, growing penetration of smartphones and increased adoption of contactless payments have driven tremendous growth for the company since 2016.
PayPal's active customer accounts more than doubled during that time to 435 million as of Dec. 31, 2022. Coupled with a significant uptick in payment transactions per active account, this is what propelled net revenue to soar 154% from 2016 to $27.5 billion in 2022 -- a compound annual growth rate (CAGR) of 16.8%. Fairly steady profitability and share repurchases helped non-GAAP (adjusted, or not based on generally accepted accounting principles) diluted earnings per share (EPS) catapult higher by 175% during that time to $4.13 in 2022. That's a CAGR of 18.4%.
It is worth noting that as competition for customers is intensifying in the digital payments market, growth is projected to slow for PayPal. But even so, PayPal is anticipated to generate 15.8% annual adjusted diluted EPS growth over the next five years. This is better than the credit services industry average annual earnings growth forecast of 14.5%. This is because Wall Street is expecting a trifecta of high-single-digit percentage annual net revenue growth, net margin expansion, and share repurchases to fuel adjusted diluted EPS growth.
The valuation is a bargain
Down 13% in the past 12 months, PayPal stock certainly does have some uncertainty in its near future: Dan Schulman, the company's chief executive officer for nearly a decade, will be retiring at the end of 2023. Filling Schulman's shoes won't be easy for PayPal. But the good news is that the financial technology company's valuation is currently so depressed, it could rally upon the announcement of a new CEO.
PayPal's forward price-to-earnings (P/E) ratio of 13.4 is much less than the credit services industry average forward P/E ratio of 17. This seems to more than price in the risks for investors, which makes the stock a compelling buy for value investors.
