There are two common ways investors make money in the stock market: growth investing and value investing. Growth investing involves finding stocks that are scaling the business at an above-average rate. In contrast, value investing focuses on finding stocks trading at a discount to their intrinsic value and buying them before they return to a reasonable price.
On rare occasions, these two views can combine into one stock, which makes that company an intriguing investment. I believe PayPal (PYPL 2.90%) is currently positioned at this crossroad, and with its dirt-cheap price combined with a large upside, it could be one of the top investment opportunities in the market.
PayPal's business is ripe for improvement
Fintech giant PayPal used to be a popular investment in its space. However, this trend has fallen out of favor with investors as growth has slowed. This contrast couldn't be more evident with the stock down around 15% compared to the market's 15% rise in 2023.
The pessimism about the stock stems from concerns that PayPal is losing market share to other digital wallets. However, I think that's the wrong way to assess the company. While many people know PayPal from the button a user can select during checkout, the business is much broader, as seen from its 2022 payment volume mix.
Image source: PayPal.
Unbranded processing from PayPal's Braintree product makes up the majority of PayPal's business. Additionally, the peer-to-peer payment platform Venmo is a large chunk of PayPal's total payment volume as well.
With Braintree growing strongly, PayPal must look to other business segments to make money. Venmo is the clear candidate, as this platform has not been well monetized despite its widespread usage. However, with new CEO Alex Chriss coming on board, he may have some new ideas to increase revenue in this vital segment and return PayPal to growth mode.
Still, it's not like PayPal isn't growing. In Q2, revenue rose 7% and is projected to increase by 8% in Q3. That's not market-crushing growth, but a slight improvement in one of its business units could easily push PayPal over the 10% growth threshold.
While the growth side of PayPal's investment thesis is limping along, the value side is becoming more attractive by the day.
PayPal's stock is at an all-time low valuation
Although PayPal's revenue is increasing only slowly, its earnings per share (EPS) have exploded higher thanks to various efficiency initiatives. In Q2, EPS came in at $0.92 compared to a $0.29 loss last year. For 2023, PayPal expects EPS to rise to $3.49 -- a 67% rise over 2022's total.
As a result of PayPal's massive earnings rise coupled with a declining stock price, the stock now appears incredibly cheap by several standard valuation metrics.
PYPL PE Ratio (Forward) data by YCharts
PayPal stock has sported earnings multiples this low before, and when its forward earnings are factored in, the stock only appears cheaper.
This presents a fantastic buying opportunity for investors, but PayPal's management is also taking advantage through share repurchases. In Q2, PayPal repurchased $1.5 billion in stock or about 2% of its average Q2 market cap. It's rare for a company to be able to repurchase that much of itself during a quarter, but PayPal's strong cash flows and cheap stock price allow it to do just that.
PayPal's share repurchases, combined with decent growth and a cheap price, are setting it up for a strong run. When this will occur is anyone's guess, but if the new CEO can generate even a hint of new success, then PayPal's stock will likely respond in unison.
PayPal's business isn't without risk, but its low stock price reduces much of that risk. PayPal stock looks like a great buy today, but you'll have to hold on to the stock for three to five years before truly judging how the business has performed.
