Owning shares of PayPal Holdings (PYPL +1.46%) hasn't been easy in recent years. While the rest of the market enjoyed 20% or greater returns in 2023, PayPal shareholders are down more than 10%.
But this has been another chapter in what seems like a never-ending nightmare, as there hasn't been much hope since the stock peaked at more than $300 in 2021. The shares recently traded at about $63.
However, some of this weakness isn't deserved, and the shares look incredibly underpriced right now. So, what can you expect in five years if you buy PayPal stock right now?
Why PayPal's stock is cheap
While the company has made a few questionable decisions in the past few years, it has grown significantly since its 2021 highs.
| Metric | Q2 2021 | Q3 2023 |
|---|---|---|
| Revenue | $6.24 billion | $7.4 billion |
| Total payment volume | $311 billion | $388 billion |
| Active accounts | 403 million | 428 million |
| Transactions per active account | 43.5 | 56.6 |
Data source: PayPal.
These metrics paint a better picture of PayPal's business than the stock price does. Active users have grown, as has the frequency with which they make purchases. This has contributed to a high total payment volume (TPV), which increases its revenue.
With just those metrics alone, you would have no reason to think that PayPal would be about 80% off its all-time high, but here we are.
Although the company is growing, it's not growing fast enough for some investors. It used to be one of fintech's most promising growth stocks, but with revenue gains holding steady in the high single-digit percentages, many have moved on from the stock.
This has pushed it into value investing territory, although the stock hasn't been adopted by this category of investors yet. But at this valuation, it won't be long before it is.
PYPL PE ratio data by YCharts. PE = price to earnings.
PayPal stock trades at a modest 18.5 price-to-earnings (P/E) ratio based on 12-month trailing earnings, but its P/E of 11 times 2024 earnings is tantalizing. Any significant earnings gains aren't coming from new growth; they're coming from increased efficiency and stock buybacks.
PayPal has strong earnings growth in front of it
PayPal had a dip in its operating margins in 2022, further accelerating its sell-off. Now that the margins have recovered, the business is producing solid profit.
New Chief Executive Officer Alex Chriss also believes he can squeeze more efficiency out of its operations, which should help margins widen during the next five years.
NASDAQ: PYPL
Key Data Points
Management has also taken advantage of the cheap stock price by repurchasing shares. During the past 12 months, PayPal has reduced its share count by over 5%. So even if earnings stay unchanged, its earnings per share (EPS) would rise 5.3% yearly due to buybacks.
If PayPal can sustain this 5% repurchase pace over the next five years, that would decrease shares outstanding by nearly 23%.
What does this mean for the stock? It adds up to strong earnings growth. Analysts project PayPal to increase EPS by 13% in 2024 and 11% in 2025, which would be market-beating growth.
PYPL EPS estimates for next fiscal year; data by YCharts.
If PayPal can steadily increase its earnings at a 12% annual pace and achieve a P/E pf 20, then a five-year projected stock price would be around $175.
While that's not close to the highs reached in 2021, it would represent a compound annual growth rate of 23%, which would blow the market out of the water.
These are fairly conservative projections and show that PayPal is a fantastic buy now.
