1 Magnificent Growth Stock to Buy Before It Soars 149%, According to a Wall Street Analyst

The past year has been tough for PayPal (PYPL 2.90%) and its shareholders. The fintech stock has fallen 27% as investors lamented over lackluster growth and weak guidance, even as the S&P 500 advanced 20% amid a resilient economy. But Wall Street thinks PayPal stock is oversold.

The median price target among analysts is $68 per share, implying 17% upside from its current price. But Morgan Stanley analyst James Faucette is even more optimistic. His bull-case price target is set at $145 per share, implying 149% upside.

Investors should treat short-term forecasts with skepticism, especially when they come from individual analysts. But PayPal warrants a closer look given the Wall Street consensus.

PayPal had a good fourth quarter but gave weak guidance

PayPal reported good results for the fourth quarter, beating expectations on the top and bottom lines. Revenue increased 9% to $8 billion and non-GAAP (adjusted) net income rose 19% to $1.48 per diluted share. Strong bottom-line growth was supported by a 39-basis-point expansion in operating margin driven by cost-reduction efforts. CEO Alex Chriss says operating efficiency remains a top priority in 2024.

However, the stock dropped about 8% following the report as investors contemplated weak guidance. PayPal expects non-GAAP earnings per share to be flat this year despite plans to repurchase $5 billion in stock. That outlook is seemingly at odds with the push to control costs, and it relates to unbranded checkout being less profitable than branded checkout solutions.

Branded checkout involves the trademark yellow PayPal button, and unbranded checkout involves behind-the-scenes solutions like Braintree. PayPal earns lower margins on unbranded payments, and that part of its business has been growing much faster -- about 6 times faster in the fourth quarter -- than branded payments.

PayPal recently redesigned its branded checkout experience, making it simpler, faster, and more convenient. The company hopes those changes will boost growth in branded payments volume, but such an outcome is not reflected in guidance. That means the 2024 outlook leaves room for upside if branded growth accelerates more quickly than management expects.

PayPal is a critical component of e-commerce infrastructure

The investment thesis for PayPal is simple. Most processors work with merchants only, but PayPal provides financial services to merchants and consumers. That affords the company a data advantage where consumer behavior is concerned. PayPal uses that information to prevent fraud and inform lending decisions, and its loss rates are among the lowest in the industry.

Additionally, PayPal has deep insight into how issuers make authorization decisions due to the sheer size of its network. It uses that information to improve authorization rates. Merchants find that combination compelling, so much so that PayPal is the most accepted digital wallet in North America and Europe.

More broadly, PayPal dominates the online payment processing market. Its 41% market share is nearly double that of the next-closest competitor, Stripe, which has a 21% market share. That means the company is a critical part of global e-commerce infrastructure and it should benefit as the industry continues to grow.

PayPal shares trade at a historically cheap valuation

Straits Research expects retail e-commerce sales to increase by 8% annually through the end of the decade. PayPal should match that pace, provided it maintains its leadership in online payment processing, but it could grow more quickly if branded checkout volume accelerates or the company manages to boost Venmo monetization.

Regardless, bottom-line expansion should outpace top-line growth as the company continues to prioritize operating efficiency and repurchase stock. Indeed, Wall Street expects earnings per share to increase by 18% annually over the next five years. That consensus estimate makes its current valuation of 15 times earnings look cheap. In fact, that is essentially PayPal's least expensive earnings multiple at any point in history.

Shareholders should not expect triple-digit returns over the next year given the uncertainty surrounding the business, but investors with a five-year time horizon should consider buying a small position in this growth stock today.