With investor sentiment on the upswing, the S&P 500 has climbed 16% year to date, a welcome turnaround after the index tumbled more than 19% in 2022. But that upbeat investor sentiment has yet to trickle down to some stocks, even though most analysts think it should. For instance, Wall Street strategists still predict substantial gains over the next 12 to 18 months for PayPal (PYPL 2.90%) and Sea Limited (SE 0.05%) shareholders.
PayPal's median 12-month price target of $85 per share implies a 35% upside from its current price, and the uppermost forecast of $126 per share implies a 101% upside, according to analyst reports compiled by CNN Business. Similarly, Sea Limited's median 12-month price target of $94 per share implies a 64% upside from its current price, and the uppermost forecast of $159 per share implies a 178% upside.
Here's what investors should know about these two growth stocks.
1. PayPal
PayPal's second-quarter results were roughly in line with expectations. Revenue rose 7% year over year to $7.3 billion, driven by particularly strong growth in unbranded payment volume. And while unbranded payments earn lower margins, non-GAAP net income still soared 24% to $1.16 per diluted share as the company continued to make progress on controlling operating expenses.
The investment thesis is simple: PayPal operates one of the largest payment networks in the world, and the two-sided nature of that network gives the company a material data advantage. Most payment service providers work only with merchants, but PayPal offers financial products to merchants and consumers. In doing so, PayPal often collects data from both sides of a transaction, affording the company a deep understanding of consumer spending habits. Most peers lack that information.
So what? That data advantage makes the company quite good at identifying fraud. So good, in fact, that PayPal has the highest authorization rates and lowest loss rates in the industry, according to CEO Dan Schulman. Merchants clearly find that compelling. PayPal is the most accepted digital wallet in North America and Europe, and the company holds a 41% market share in online payment processing, nearly double the 21% market share held by runner-up Stripe.
Here's the bottom line: PayPal is set to benefit as online shopping becomes more prevalent in the years ahead. Indeed, retail e-commerce sales are expected to grow at 7.6% annually through the end of the decade, according to Precedence Research, and PayPal should at least manage to match that pace. That makes its current valuation multiple of 2.5 times sales look quite reasonable, and it's certainly a discount to the three-year average of 8 times sales.
That said, the odds of triple-digit returns in the next year are remote at best. The global economy has yet to recover from scorching inflation, and consumer spending is still under pressure. Investors should only buy this growth stock if they plan to hold for at least three years. Even then, it would be prudent to start with a small position.
2. Sea Limited
Southeast Asian holding company Sea Limited reported mixed results in the first quarter. Total revenue rose just 5% year over year to $3 billion as strong growth in the e-commerce and fintech segments was largely offset by weakness in the digital entertainment segment. But the company still made progress on cost control, generating $606 million in cash from operations, much improved from the $723 million it burned last year.
Sea Limited has subsidiaries in e-commerce, digital financial services, and digital entertainment. The investment thesis centers on those three opportunities. Specifically, e-commerce subsidiary Shopee is the most-visited online marketplace in Southeast Asia and Taiwan, and its gaining momentum in parts of Latin America. The company has strategically reinforced its leadership with adjacent services for advertising, fulfillment, and payment processing. Online retail sales across all relevant geographies are expected to rise at 12% annually through 2027, according to Statista.
Fintech subsidiary SeaMoney processes payments for Shopee merchants, but it also provides financial services to third-party merchants and consumers. Its relationship with Shopee has been a powerful tailwind, and SeaMoney should continue to benefit as online shopping becomes more prevalent. Digital payment volume across Southeast Asia is expected to grow at a 14% rate annually through 2027, according to Statista.
Finally, digital entertainment subsidiary Garena is best known for developing Free Fire, a mobile game that saw its popularity slip and then rebound in recent quarters. Garena Free Fire was the ninth-most downloaded game last year, but it took the No. 3 spot in the first quarter, then improved to No. 2 in the second quarter. Digital entertainment revenue still fell 43% year over year in the first quarter as paying users fell nearly 40%, but the resurgence in popularity is encouraging. The global mobile game market is expected to grow at 7% annually through 2027, according to Statista.
Here's the bottom line: As inflationary headwinds to consumer spending continue to ease, Sea Limited should be able to reaccelerate revenue growth into the mid-teens or higher given its strong presence in e-commerce, digital financial services, and mobile gaming. That makes its current valuation of 2.6 times sales look quite reasonable, and it's certainly a bargain compared to the three-year average of 12.7 times sales.
As with PayPal, Sea Limited shareholders are unlikely to see triple-digit returns in the next 12 months, but investors willing to hold this growth stock for at least three years should consider buying a small position today.
