Shares of mobile payment leader PayPal Holdings (PYPL -1.71%) has shed 49% of its value so far this year, thanks to a broader sell-off linked to stubbornly high inflation and rising interest rates. Macro headwinds, in addition to company-related problems such as eBay‘s (EBAY -1.23%) switch to another payment platform, has led to less than ideal growth for the financial technology (fintech) giant of late.
But I expect PayPal’s business to bounce back in a significant way. Not only does the company hold 50.3% of the online payment processing market, but it also continues to expand its business with service offerings such as Venmo – a leading peer-to-peer payment platform – and buy-now-pay-later (BNPL), an upcoming concept which allows consumers to pay for goods in equal installments over a set period of time.
With all that in mind, let’s take a look at PayPal’s current state to help investors gauge whether the stock is worth their time today.
Let’s focus on the basics
PayPal delivered its second-quarter earnings report after hours on August 2, sparking a much-needed rally in its share price. The company’s total sales rose 9.1% year over year to $6.8 billion, finishing in line with Wall Street estimates, and its adjusted earnings per share fell 19.1% to $0.93, but managed to top consensus forecasts with 6.6%.
Meanwhile, its total payment volume (TPV) was $339.8 billion, up 9.3% from a year ago. The company also added 400,000 new accounts to bring the total up to 429 million.
PayPal’s growth in the quarter was nice, but it certainly wasn’t flawless. During the earnings call, CEO Dan Schulman stated that the eBay payments transition caused a 400 basis point drag on top-line growth in Q2. But on the bright side, he also noted that the effect should fall to 100 basis points next quarter and be negligible from there on out.
eBay has previously signed an agreement with Adyen, a global payment processor, to act as its primary payment processing partner, taking over the position from PayPal. As a result, the digital payments company is currently experiencing growing pains, but it should be in good shape once eBay is completely out of the picture. Ex-eBay revenue growth has been consistently north of 20%.
Schulman also discussed the company’s goal of reducing its cost structure by leveraging its massive scale to drive cost reductions across its supplier base. By 2022, it expects to reduce costs by $900 million across operational and transaction expense categories, and by 2023, it projects an additional $1.3 billion in savings.
That’s not to say PayPal isn’t in a healthy financial position already — the company has $8.3 billion in cash and short-term investments, and it generated $1.3 billion in free cash flow (FCF) in Q2 alone. This corresponds to a growth of 21.9% year on year. Even after the new increase, PayPal still trades at 29 times earnings, which represents a big discount from its five-year average price-to-earnings multiple of 57.2. In other words, investors should not feel that they are too late to buy shares.
Should investors pay for PayPal today?
PayPal is a solid investment right now for patient, long-term investors. In many ways, I can understand the steady decline we’ve seen with fintech companies, as it’s very common for investors to dump speculative stocks in times of economic uncertainty.
But PayPal is different – the fintech juggernaut not only controls a large portion of the burgeoning mobile payments market, but is also highly profitable and consistently generates FCF. It doesn’t sound like a speculative investment to me, but investors continue to punish the company in such a way. Combine that with its all-time low value, and PayPal appears to be a fantastic investment opportunity today.
Luke Meindl holds positions in PayPal Holdings. The Motley Fool has positions in and recommends Adyen NV and PayPal Holdings. The Motley Fool recommends Adyen and eBay and recommends the following options: short October 2022 $50 calls on eBay. The Motley Fool has a disclosure policy.