When I first heard that PayPal Holdings (PYPL 0.68%) was going public, I couldn't wait to get my hands on shares -- literally. Instead of waiting, I purchased shares of its parent company, eBay, ahead of PayPal's spinoff. In 2015, that happened, giving me shares of PayPal on day one of trading.
Shortly thereafter, I sold my shares of eBay, but I've held PayPal stock through thick and thin ever since. That changed this month: After nine years, I finally decided to sell my entire position in PayPal. I also sold some of my position in Zoom Video Communications (ZM 1.91%). And with this cash, I immediately went out and bought a meaningful position in Academy Sports and Outdoors (ASO 4.75%).
NASDAQ: ASO
Key Data Points
Investing is personal, and I wouldn't suggest that people copy exactly what I do. But I would like others to know why I made these moves because my rationale could help guide their decisions under different circumstances.
I still believe in PayPal and Zoom
My decision to sell PayPal and Zoom doesn't mean that I believe they're headed lower. On the contrary, I think both could be headed higher long term.
In PayPal's case, it still has an enormously important business with 426 million active accounts and more than $1.5 trillion in payment volume in 2023. It generates billions of dollars of free cash flow annually, which management is using to reduce its outstanding share count -- it cut it by 4% in 2023 alone. And it recently brought in a new CEO to set out a new vision for its future.
Turning to Zoom, the prevailing narrative is that nobody uses the video communications platform anymore now that pandemic restrictions have eased. But this take isn't in touch with reality. The company ended its fiscal 2024 in January with 220,000 enterprise customers -- its number highest ever. So its platform is still getting plenty of use. And like PayPal, this company is free-cash-flow positive. Moreover, it's in a cash-rich position with $7 billion in cash, cash equivalents, and marketable securities on the books.
Their growth may have slowed, but business is still quite good for both PayPal and Zoom. Moreover, both stocks trade near all-time low price-to-sales valuations, which mitigates downside risk.
PYPL PS Ratio data by YCharts.
Why sell PayPal and Zoom?
Investing is an exercise in balancing risk with reward potential. With PayPal and Zoom, I believe the downside risks are low -- indeed, I think both may have already hit rock bottom. However, I question how big their upsides are.
I think PayPal made a great CEO hire when it brought Alex Chriss over from Intuit. He brings an expertise with small-business customers to the table. However, management is calling 2024 a "transition year," and says it expects little growth. Therefore, it will take time to tell whether Chriss has the right strategy and vision to reinvigorate long-term growth. In short, shareholder returns will probably be modest for a while.
The same could be said for Zoom. While the company is still upselling customers on ancillary products, many of its customers have downsized their companies. As their contracts come up for renewal, they won't need to pay for as many seats for Zoom's video conferencing platform. Management expects less than 2% top-line growth in the coming year, limiting the potential near-term upside for the stock.
With Academy Sports, I believe the risk to investors is comparable to the risk with PayPal or Zoom: low. But I believe Academy Sports' potential upside is much better.
Ideally, I would have held onto my shares of PayPal and Zoom and put new money to work with Academy Sports. But I was strapped for fresh cash I could invest, so I opted to make what I believe is a portfolio upgrade by redeploying some already-invested assets.
Why I bought Academy Sports
When it comes to its valuation, Academy Sports is incredibly cheap, trading at less than 9 times earnings, as of this writing. But this is far from a value trap -- this company offers investors growth at a (very) reasonable price.
Ever since it went public in 2020, Academy Sports has met every goal it has set. That's a big reason why I believe its targets for 2027 are credible. The company plans to open new stores, boosting its annual revenue to $10 billion while commanding a 10% profit margin. The chart below shows it's within striking distance of these goals.
ASO Revenue (TTM) data by YCharts.
Therefore, Academy Sports is aiming for $1 billion in net income within the next few years. The stock is so cheap already that I believe it's unreasonable to expect it to get cheaper. Assuming the company hits its profit goal and its valuation ratio stays the same, then Academy Sports stock has more than 90% upside.
Its valuation could also reasonably increase. Competitor Hibbett was just acquired at a buyout price that valued it at 11 times earnings, for example. With a small increase in valuation and success over the next few years, Academy Sports stock would more than double.
In summary, I believe PayPal, Zoom, and Academy Sports are all low-risk investments. But Academy Sports has the easiest path to market-beating upside from today's price, which is why I decided to make these changes in my portfolio.
