The war on cash, a phrase that refers to the shift from physical currency to digital payments, is in full swing. By 2030, the mobile payments market is expected to reach $588 billion, representing a compound annual growth rate (CAGR) of 35.3% from 2022, according to Grand View Research. Understanding the secular trend, wise investors should be very intrigued after watching Nasdaq Composite fell 21% since the turn of the year.
With many financial technology (fintech) stocks now trading at record lows, long-term investors have many promising buying opportunities. One company in particular, PayPal Holdings (PYPL 2.35%), has caught my attention lately. The fintech giant is not only highly profitable and cash flow positive, but it also commands 50.3% of the electronic payment processing environment. And despite its top position in a massive secular growth market, the company has lost 53% of its value so far this year.
Let’s dive into PayPal’s situation and find out if it’s a smart investment right now.
What’s new for PayPal?
On July 27, PayPal’s stock surged more than 10% after news emerged that an activist investor, Elliott Management, has been steadily accumulating the stock. It is suspected that the investment firm plans to take a large stake in the company so that it can speed up PayPal’s cost-cutting measures. While this could be interpreted as positive news for the mobile payment company, I would rather focus on the underlying fundamentals of the business.
According to its first-quarter earnings report, the company’s total sales grew 7.5% year-over-year to $6.5 billion, and its diluted earnings per share jumped 27.9% to close at $0.88. Typical of many fintech companies today, management cited a number of reasons why growth is slowing, notably softness in e-commerce, eBay‘s (EBAY 0.64%) continued transition to a separate payment platform, and ongoing inflation that dampens consumer spending.
In terms of other key figures, PayPal’s total payment volume (TPV) increased 13.1% to $323.0 billion, and it added 2.4 million new accounts during the quarter to bring the total to 429 million.
Investors should anticipate a bumpy ride for the rest of 2022 — Wall Street analysts forecast the company’s total revenue to rise 11.1% year-over-year, up to $28.2 billion, and earnings per share to fall 16, 3% to $3.85. However, the narrative should improve next year, with analysts projecting top- and bottom-line growth of 16% and 23.1%, respectively. PayPal is to publish its earnings report for the second quarter today.
Do I recommend buying PayPal today?
For several reasons, I encourage investors to consider buying PayPal stock right now. First, unlike much of its competition, the company has proven to be extremely profitable and cash flow positive, generating $1.1 billion in free cash flow (FCF) in the first quarter alone. Second, PayPal is a dominant force in a fast-growing market, and the company continues to diversify its business with offerings such as peer-to-peer payment platform Venmo and a buy-now, pay-later option. Finally, the stock currently has a price-to-earnings multiple of around 29, a steep discount to its five-year average of more than 57.
It’s clear that many investors have temporarily fallen in love with this fintech juggernaut, but that doesn’t mean prudent investors should shy away today.
Luke Meindl holds positions in PayPal Holdings. The Motley Fool has positions in and recommends PayPal Holdings. The Motley Fool recommends Nasdaq and eBay and recommends the following options: short July 2022 $57.50 calls on eBay. The Motley Fool has a disclosure policy.