While fintech stocks used to be the hottest group on Wall Street, that's no longer the case. Throw in some self-inflicted blunders, and you get a poorly performing stock.
This is what PayPal (PYPL 2.90%) has been. The stock currently trades around $65, a level last seen in 2017.
While PayPal deserved to be knocked off its $308 all-time high, it is undervalued at its current level. This and a few other reasons (four, in fact) prompted me to purchase PayPal stock recently. Read on to find out my other reasons and why I think it would be smart for other investors to follow suit.
1. Massive earnings growth
While many investors think of PayPal as a growth stock, they will have to flip their mentality if they want to invest in it now. Gone are the days of strong growth; now, PayPal shareholders need to be content with market-average growth. In Q1, PayPal's revenue rose 9% year over year, and the guidance management gave indicates only 7% growth in Q2.
That's not going to light the world on fire for growth. However, bottom-line growth has been exceptional. Earnings per share (EPS) rose 61% to $0.70 in Q1, and 2023 EPS is projected to rise 64%. Multiple market-crushing stocks have found a winning formula with growing earnings faster than revenue through efficiency improvements and share buybacks, so just because PayPal isn't growing revenue at a quick pace doesn't mean it can't outperform the market.
Furthermore, this isn't a one-year trend. Wall Street analysts expect PayPal to deliver EPS above management's levels, as they predict $4.95 this year and $5.65 next year (14% growth).
With significant gains ahead, PayPal's stock is still a growth machine -- just in a different form. Yet, the market isn't giving the stock any respect.
2. The stock is dirt cheap
Looking at the trailing earnings doesn't do PayPal justice. Because the company is experiencing a significant, sustainable EPS boost this year, a forward price-to-earnings (P/E) ratio is a better way to assess its valuation. Judging by this metric, PayPal trades at an astonishingly cheap level.
PYPL PE Ratio data by YCharts
At around 13 times forward earnings, PayPal is much cheaper than the S&P 500, which trades at nearly 20 times forward earnings. If you have a company valued at a 35% discount yet growing earnings much faster than the market pace, you have a recipe for a stock that can vastly outperform the index.
3. New business deals
PayPal's business is also getting stronger. In June, PayPal announced a deal with KKR to purchase up to 40 billion euros ($44 billion) in buy now, pay later loans in select European countries.
This is significant, as it allows PayPal to continue originating these lucrative loans, yet the company doesn't have to keep the risk on its balance sheet. Furthermore, it also shows a significant financial company trusts PayPal's vetting process, as KKR doesn't want to put suboptimal loans on its balance sheet.
This deal also allowed PayPal to increase its share buybacks by $1 billion, which will increase the speed by which PayPal can grow its earnings per share, as it is reducing the denominator in the ratio.
PYPL Shares Outstanding data by YCharts
With PayPal still closing deals and expanding its reach, it shows the company is far from obsolete. And one new catalyst could spark a new wave of growth.
4. New leadership is coming
After PayPal was spun off from eBay, Dan Schulman led the company as CEO. With nearly a decade at the helm, he is retiring at the end of 2023.
While Schulman has done an overall great job at growing PayPal's business, he hasn't done the best job as of late for shepherding a new chapter in PayPal's business. While we don't know who the next PayPal CEO will be, it's clear that this job could be quite lucrative. With new leadership at the helm, PayPal will welcome new ideas that could ignite a long-dominant business.
I'm excited about this new direction, and unless the board makes a poor hire, PayPal will emerge from this search just fine.
PayPal's stock is a sleeping giant, and for the cheap price you can pick the stock up for today, I think it's a no-brainer in a market that has gotten quite expensive.
