The S&P 500 just snapped a streak of three consecutive quarters of earnings declines, and Wall Street analysts expect profit growth to accelerate through 2025. That catalyst could send the S&P 500 steadily higher, as evidenced by its consensus price target of 5,038, which implies 12% upside over the next year.
In the meantime, investors should take a look at PayPal Holdings (PYPL 1.94%) and Etsy (ETSY 0.08%). Both stocks are priced below $100 per share, so neither will break the bank, and they trade at attractive valuations relative to their future growth prospects.
In short, they're bargains right now, and both could soar as the S&P 500 moves higher in the coming years.
1. PayPal Holdings
PayPal operates a two-sided payments platform that provides financial services to merchants and consumers. That strategy gives the company a data advantage over payment service providers that work only with merchants. Specifically, PayPal has a better understanding of consumer spending habits, which translates into deeper merchandising insights and better fraud protection for merchants.
Indeed, CFO Gabrielle Rabinovitch says PayPal has the lowest loss rates and best authorization rates in the industry. Merchants clearly find that compelling. PayPal is the most accepted digital wallet in North America and Europe, and it powers about 41% of online payment processing, nearly twice as much market share as its closest competitor Stripe.
PayPal reported solid financial results in the third quarter. Revenue increased 8% to $7.4 billion, and non-GAAP (generally accepted accounting principles) net income climbed 14% to $1.4 billion as the company continued to manage expenses while still investing in product development across its digital wallets and checkout solutions.
Here's the bottom line: PayPal has matured as a business, so the days of 20%-plus revenue growth are probably in the past. But the company should at least keep pace with retail e-commerce sales, given its leadership position in online payment processing, and that market is expected to grow 8% annually through 2030.
Indeed, Morningstar analyst Brett Horn expects annual revenue growth of 11% for PayPal over the next decade. That forecast makes its current valuation of 2.2 times sales look cheap, especially compared to the three-year average of 7.1 times sales. Patient investors should have no reservations about buying this stock today.
2. Etsy
Many investors believe Etsy peaked during the pandemic. The company saw phenomenal sales growth as business closures and social distancing drove consumers online, and its marketplace became a go-to shopping destination for face masks and household essentials. But momentum ground to a halt as the pandemic abated, giving rise to the notion that Etsy was a flash in the pan.
Its third-quarter financial results did little to dispel that notion. Gross merchandise sales (GMS) ticked higher by a mere percentage point, revenue increased just 7% year over year to $636 million, and non-GAAP earnings before interest, taxes, depreciation, and amortization (EBITDA) climbed 9% to $182 million. To make matters worse, management gave weaker-than-expected fourth-quarter guidance that calls for a slight decline in GMS despite the uplifting effects of the holiday season.
There's no denying the gravity of the situation, but investors should think twice before dismissing Etsy. Inflation has been a profound headwind to consumer spending over the last two years, and Etsy is particularly susceptible, given that it deals in discretionary goods. But the company occupies a unique niche among retailers, and its growth could reaccelerate as inflationary pressure subsides.
Specifically, Etsy is the sixth-most-visited online marketplace in the world, signaling brand authority arising from its focus on noncommoditized items. COVID bolstered that brand authority. Quarterly growth in new buyers is higher today than it was pre-pandemic. The problem is buyers are spending less, but I think that says more about the economy than anything else.
Indeed, CFO Rachel Glaser said as much on the most recent earnings call: "We estimate that GMS from our buyers in the top decile of household income increased over 20% year over year in the third quarter, a positive indicator that Etsy's overall growth can improve as macro conditions stabilize over time."
With that in mind, Morningstar analyst Sean Dunlop believes GMS will return to double-digit growth as soon as 2025, driving revenue growth toward 17%. Trading at 3.5 times sales, well below its historical average, investors should feel comfortable taking a long-term position in this e-commerce stock right now.