Warren Buffett and his team at Berkshire Hathaway (BRK.A -0.76%) (BRK.B -0.69%) aren't ones to buy stock on a whim. Each company they purchase first is rigorously examined for value investing criteria.
While we don't know what Buffett and company are eyeing next, we can scan the stock market for companies that fit their investment criteria, like cheap valuations, strong brands, and maybe certain industries (like banking, fintech or insurance). When doing this, I came across one stock Berkshire may be interested in purchasing: PayPal (PYPL 2.90%).
PayPal would look right at home in Berkshire's portfolio
So, why PayPal? Well, it checks a lot of Buffett boxes. First, it's a company with a strong brand. PayPal has been around for a long time and is a payments processing name sellers and buyers trust. If you look at Buffett's portfolio, it's filled with names like Coca-Cola, American Express, and Kraft Heinz -- all recognized by consumers.
With its brand, PayPal wouldn't look out of place in Berkshire's holdings. Furthermore, it's a fintech -- an industry with a strong presence in Buffett's portfolio.
Berkshire owns shares in three of the four major credit card companies in the U.S. and StoneCo, a Brazilian fintech. With PayPal fitting right into this group, it wouldn't be far-fetched for Berkshire to add it to its basket.
One thing that may hold Berkshire back from purchasing PayPal is new management. Buffett once said, "Buy stock in a business that's so good that an idiot can run it because sooner or later one will." PayPal's prior chief executive officer, Dan Schulman, was quite good overall but made a few questionable decisions pertaining to customer acquisition and business direction in 2021 and 2022 that hurt the company. New CEO Alex Chriss will be in charge of righting the ship, but overall, PayPal can be a fairly easy business to manage if it sticks to what it's good at.
I think the management part can easily be fixed. Given how cheap the stock is, it will be tough for Berkshire to ignore.
PayPal's earnings are growing above the market pace
PayPal hasn't lit the world on fire recently, which has caused it to fall from the ranks of other growth stocks. However, the value investing crowd hasn't picked it up yet, although that time is quickly approaching.
PayPal revenue rose only 8% in Q3, slower than the 10% market baseline. In Q4, this weakness is expected to persist, with only 6% to 7% growth expected. However, PayPal has transitioned from a revenue growth story to an earning growth one.
Although earnings shrank in Q3 (thanks to a one-time benefit in 2022's Q3 results), in Q4, they are expected to rise to $1.20 from $0.81 last year. In 2024, PayPal's earnings are expected to rise 12% -- a market-beating pace. So, with this kind of earnings growth, you'd expect the stock to trade at a premium to the market, but that's far from the case.
Data source: YCharts.
Compared to the S&P 500's trailing price-to-earnings (P/E) ratio of 26 and forward P/E of 19, PayPal trades at a significant discount to the market.
If PayPal's stock could match the forward P/E estimate, that would represent about a 50% upside. However, if PayPal can continue increasing its earnings at a market-beating pace, it should be a market-beating investment over the long term.
That's a pretty attractive proposition for Buffett and Berkshire. But even if they don't buy it, that doesn't mean you can't capitalize on several Buffett-like qualities in this investment.
