All three major U.S. market indices moved higher over the past year. The Dow Jones Industrial Average advanced 14%, the S&P 500 climbed 22%, and the Nasdaq Composite soared 32%. But some Wall Street analysts still see upside in PayPal Holdings (PYPL 2.90%) and Salesforce (CRM 0.42%).
Brett Horn at Morningstar has set PayPal with a price target of $104 per share, implying 79% upside. Similarly, Keith Weiss at Morgan Stanley has set Salesforce with a bull-case price target of $481 per share, implying 72% upside.
Here's what investors should know about those stocks.
1. PayPal Holdings
PayPal posted solid results in the fourth quarter. Revenue increased 9% to $8 billion on strong growth in total payments volume. Non-GAAP net income jumped 18% to $1.6 billion due to effective expense control and share repurchases. Those numbers beat estimates, but guidance disappointed. Management said non-GAAP earnings would be flat in 2024 despite its focus on operating efficiency, including a planned 9% headcount reduction.
Wall Street expected non-GAAP earnings growth of 7%. But guidance fell short because payment volume on unbranded checkout products like Braintree is growing much faster than payment volume on branded checkout products. Unbranded checkout earns lower margin, and management believes that will offset any revenue growth this year.
On the bright side, PayPal redesigned its branded checkout experience to improve speed and reduce friction. Those changes could accelerate branded payment volume growth in the future, but guidance includes minimal contribution from new innovations because they will take time to scale. In that context, the 2024 outlook leaves room for upside if the new branded checkout scales more quickly than anticipated.
Ultimately, the investment thesis is unchanged and it remains compelling. PayPal dominates the online payment processing space, with nearly twice as much market share as the next closest competitor. That means revenue growth should at least match retail e-commerce sales growth in the years ahead, provided the company can maintain its market share. However, PayPal is also working to drive adoption of the Venmo debit card, which could help it gain share in physical retail.
With that in mind, Brett Horn at Morningstar expects PayPal to grow sales at 8% annually over the next decade. That forecast seems reasonable given that retail e-commerce sales are forecasted to grow at 8% annually through 2032. With that in mind, the current valuation of 2.2 times sales looks cheap. In fact, the stock is trading near its cheapest price-to-sales multiple in history. While I doubt shareholders will see a 79% return in the next 12 months, investors with a five-year time horizon should consider buying a small position in the stock.
2. Salesforce
Salesforce reported better-than-expected earnings in the third quarter of fiscal 2024 (ended Oct. 31). Revenue increased 11% to $8.7 billion on particularly robust growth in data analytics and integration tools, followed by customer service and sales software. On the bottom line, non-GAAP net income soared 48% to $2 billion as the company continued to focus on profitability. Salesforce is well positioned to maintain that momentum.
The investment thesis is straightforward. Salesforce is synonymous with customer relationship management (CRM) software. The company accounted for 22.1% of CRM spending through the first half of last year, which is more than the next four competitors combined. So strong is its market presence that research company G2 recognized Salesforce as the best software seller in any category in 2024.
Salesforce is also innovating with artificial intelligence (AI). Its CRM platform comprises productivity applications for marketing, sales, customer service, and commerce, and its Einstein Copilot brings AI capabilities to those tools. For instance, Einstein Copilot lets users generate marketing content, surface sales insights, craft personalized customer service responses, and customize online storefronts with natural language prompts.
Morgan Stanley's bull-case price target of $481 per share is predicated on a discounted cash flow model that assumes 16% annual sales growth through fiscal 2028 (ends Jan. 31, 2028). That is plausible given that CRM spending is forecasted to grow at 14% annually through 2030, but investors should temper their expectations.
Revenue increased 11% in the most recent quarter, and a similar trajectory is probable in the coming years. That estimate makes the present valuation of 8.3 times sales seems fair, despite being a slight premium to the three-year average of 7.5 times sales. Share-price appreciation to the tune of 72% is unlikely over the next 12 months, but investors with a five-year time horizon should consider buying a small position in this stock today.
