Last year was a tough one for investors, with the stock market suffering its worst performance in more than a decade. At long last, however, it appears the economy -- and by extension, the stock market -- may finally be on the mend. In fact, each of the major market indexes has rallied more than 20% from its recent bottom, causing some market prognosticators to call the beginning of the next bull market -- at least by that measure.
Thus far, however, the rebound has been uneven and not all technology stocks have participated in the recovery. As a result, there are still numerous opportunities for investors to profit from solid businesses with stocks that have yet to bounce back. Analysts are remarkably bullish about the prospects of one beaten-down growth stock. In fact, if Wall Street is right, this stock is set to soar 113% over the coming 12 to 18 months.
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A fintech pioneer battered by macroeconomic headwinds
PayPal (PYPL 2.90%) became the face of fintech before the term was fashionable. The company made a name for itself by developing a novel, safe, and effective payment method that coincided with the early expansion of e-commerce. More recently, the onset of the pandemic sent consumers looking for convenient and well-known digital payment options, and few rose to the level of PayPal.
The recent downturn, however, revealed a chink in the company's armor. Economic headwinds, including high inflation and rising interest rates, caused low-income users to spend less, which dented PayPal's growth. Last year, the company generated net revenue of $27.6 billion, up 10%, in sharp contrast to its 25% growth in the midst of the pandemic. New user growth also slowed after its pandemic-era growth spurt, as net new active accounts grew just 2% in 2022, compared to a record 95% growth in 2020 -- resulting in unreasonably tough comps.
Yet, as the economy begins its inevitable rebound, some investors are waiting for evidence of PayPal's recovery, presenting savvy investors with a compelling opportunity, as PayPal stock remains 77% off its mid-2021 peak.
A rebounding is on the horizon
PayPal has met these challenges head-on, slashing its budget to adjust to the changing economic landscape. Management announced plans to cut expenses by more than $900 million in 2022, aiming for $1.3 billion in cost cuts this year. Late last year, the company announced incremental cost savings of $600 million for 2023. In addition to the highly publicized job cuts, PayPal also slashed its real estate footprint, while focusing on productivity and efficiency gains. CEO Dan Schulman recently predicted that expenses will be lower in 2024 than this year.
The company has a long history of using artificial intelligence (AI) to combat fraud and enhance risk management. Schulman said recent advancements in generative AI are already being deployed and will help accelerate PayPal's recent productivity gains and yield benefits for years to come.
Those efforts are already yielding progress. In the first quarter, PayPal raised its full-year guidance and is now expecting revenue to grow in a range of 7.5% to 8%, but the company is expecting earnings per share (EPS) growth of 25% at the midpoint of its guidance. This illustrates that more of every dollar is flowing to the bottom line, juicing profits along the way.
Furthermore, several recent developments could boost PayPal's growth even further. The company just introduced a Venmo Teen account, which parents can open on behalf of teenagers between 13 and 17 years old. The move is intended to help teach money management skills to teens, while also introducing them to Venmo. Once they start using the fintech app, chances are users will continue.
PayPal also inked a deal with global investment firm KKR to purchase up to 40 billion euro (roughly $44 billion) of current and future PayPal Pay Later loans made to European users. This will free up PayPal's balance sheet, putting the company on a sturdier financial footing.
Late last month, PayPal introduced a Tap to Pay feature for Venmo and Zettle business accounts, which allows merchants to accept touchless payments. The feature is currently available on Alphabet's Android phones and will soon be rolled out to Apple iPhones as well. This shows the levers management continues to pull to expand its business.
PayPal has become a much leaner company over the past year. Once the economy improves and low-income users start spending again, PayPal's recovery should begin in earnest.
Wall Street is overwhelmingly bullish on PayPal
Many on Wall Street believe a rebound is imminent. Of the 44 analysts that cover PayPal, 32 rate it a buy or strong buy, and not a single one recommends selling. Canaccord analyst Joseph Vafi is the most bullish on Wall Street, maintaining a price target of $160 and a buy rating on PayPal shares. This represents potential gains of 131% compared to Monday's closing price.
One potential growth driver Vafi cites is PayPal's Venmo. What initially began as a free, peer-to-peer money transfer system has expanded into a full-fledged payment app. It's also being adopted by a growing set of merchants, as evidenced by its recent debut on Amazon. While estimates vary, Vafi believes that are at least 55 million monthly active Venmo users in the U.S. and posits that this ongoing expansion will accelerate the network effect, acting as a catalyst for additional growth.
If the analyst is right -- and based on the evidence presented above, I'm convinced he is -- PayPal stock could soar 131% over the coming 12 to 18 months, with shareholders reaping the rewards.
Historically, PayPal stock hasn't been cheap, but at just 2 times next year's sales and 12 times forward earnings, the stock is selling for a song.
With multiple catalysts to drive a rebound, an inexpensive stock price, and the backing of some of Wall Street's finest, now seems like a good time to buy PayPal ahead of the stock's strong recovery to come.
