Sometimes being a contrarian can pay off. While it can be a challenge, doing your own homework and not following the crowd are attributes that distinguish some of the best investors.
When it comes to investing in a growth industry, it can be easy to get bogged down by the sheer number of players in the sector looking to capitalize on the same themes. Many investors flock to -- or shun -- the same stocks without really understanding the fundamentals of each underlying business. As a result, some solid companies fall out of favor and are seen as poor opportunities.
For fintech in particular, online payments company PayPal (PYPL 2.90%) seems to fit into the category of a negatively perceived stock. As PayPal shares trade near all-time lows, a thorough analysis of the business suggests that now is a lucrative time to scoop up some shares on the dip.
Is PayPal's business broken?
PayPal is an online transactions platform that helps both buyers and sellers, offering a number of merchant solutions within its ecosystem and playing an integral role in the world of digital payments. However, a cursory look at PayPal's financial results might suggest its best days are behind it. The table below illustrates some important metrics for PayPal over the past year.
| Category | Q3 2022 | Q4 2022 | Q1 2023 | Q2 2023 | Q3 2023 |
|---|---|---|---|---|---|
| Total payment volume (TPV) | $336.9 billion | $357.4 billion | $354.5 billion | $376.5 billion | $387.7 billion |
| Net revenue | $6.8 billion | $7.4 billion | $7.0 billion | $7.2 billion | $7.4 billion |
| Operating margin | 16.3% | 16.8% | 14.2% | 15.5% | 15.7% |
Data source: PayPal Investor Relations.
Two takeaways from the figures above are that PayPal's revenue growth is lumpy and operating margin is falling. PayPal faces intense competition, and it's not just from traditional financial institutions. The advent of payment services from tech behemoths like Apple and Alphabet has given investors some trepidation over PayPal's market position. On the surface, the results above might give credence to the notion that PayPal is losing market share.
However, a contrarian might think that as online shopping and digital payments become more common, PayPal's addressable market is actually expanding -- thereby providing a low barrier to entry for new competition.
According to research from the International Trade Association (ITA), the global business-to-business and business-to-consumer e-commerce markets are projected to grow at compound annual rates of 14.5% and 14.4%, respectively, through 2026 and 2027. In total, the ITA forecasts more than $40 trillion in e-commerce sales by 2027, with Asia being one of the biggest contributing markets.
Image source: Getty Images.
Does PayPal have any catalysts?
According to the company's third-quarter earnings, while total payment volume (TPV) increased 15% year over year, international TPV grew 19% "driven by strength in Europe as well as improvements in Asia." The tailwinds in Asia could be a subtle growth driver as platforms that support PayPal, including shopping app Temu operated by PDD Holdings, continue to gain traction over the likes of Alibaba.
A more near-term catalyst for PayPal stems from activity surrounding holiday shopping.
Our prelim PayPal #s from Thanksgiving-Cyber Monday show the impact we have with customers:
-- Alex Chriss (@acce) November 28, 2023
🟢Processed approx. 400M transactions
🟢Put ~$8M back in customers' hands with cash back + savings
🟢Cyber Mon was largest shopping day of the year with approx. $5.8B in TPV and 87M txns
PayPal's new chief executive officer posted the above on X (the social media site formerly known as Twitter) to provide some insight on Black Friday and Cyber Monday shopping. Processing nearly $6 billion and 87 million transactions is a nice preview of what's to come for PayPal's Q4 earnings.
Is PayPal stock a buy?
One thing to keep in mind about PayPal is that even though revenue growth and operating margin are decelerating, the company is still highly profitable. It has projected free cash flow -- or cash flow left after paying for capital expenditures -- of at least $4.6 billion in 2023. This is relatively in line with the company's historical free-cash-flow figures, which have hovered around $5 billion each year since 2020.
From a valuation perspective, the chart below might suggest that PayPal stock is oversold.
Data source: YCharts
The stock is down about 17% year to date and its trailing price-to-earnings (P/E) multiple of 17.7 is not only well below historical averages, but it's also close to PayPal's all-time low P/E.
Data source: YCharts
On top of that, the company's forward price-to-earnings multiple of less than 12 is significantly below the broader markets. The forward P/E of the S&P 500 now is about 21.
If anything, the charts above suggest that PayPal is undervalued. And while not all on Wall Street are so negative on the stock, long-term investors should consider the upside from the long-term trends in e-commerce coupled with the company's growing international business. Moreover, many investors may be overlooking the optimism for e-commerce in Asia and how PayPal can benefit.
Given the rock-bottom trading levels, investing in PayPal now could prove to be a rare opportunity to build generational wealth depending on your capital allocation and time horizon. Moreover, investors shouldn't overlook the influence holiday shopping can have on e-commerce businesses, signaling that now could be a good opportunity to buy PayPal stock before Q4 earnings. Long-term investors may come to see that taking advantage of PayPal's bargain price action could be an incredibly savvy move.
