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PayPal Holdings Inc.
PYPL-Q
BUY ON WEAKNESS
Feb 10, 2023
Stock price when the opinion was issued
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Premium contentWe like that the financial payment company is trading at 13x earnings and supporting a 20% ROE. Cash reserves are growing, while the company aggressively buys back shares and debt is retired. We recommend setting a stop-loss at $57, looking to achieve $94 — upside potential of 32%. Yield 0%
(Analysts’ price target is $94.29)The company has some challenges, no doubt, but these are starting to be reflected in the valuation, now at just 13X earnings. EPS did beat estimates in the Q1, by 15%. PayPal is making progress with sustainable transaction-margin dollar gains, up 7% in 1Q, driven by branded checkout, Venmo and a deceleration in Braintree. The EPS beat in 1Q and maintained 2025 guidance of high-single-digit adjusted EPS gains leave room for absorbing tariff pain and allow for strategic reinvestment in growth initiatives in 2025. Adjusted operating margin widened 270 bps sequentially, paving the way for further efficiency gains. Despite fading interest-income tailwinds and slowing unbranded volume gains (2% FX neutral in 1Q), higher-margin branded transaction growth remains steady (6%). PYPL plans to buy back $6 billion of shares in 2025, with $6-$7 billion in free cash flow, after 1Q repurchases of $1.5 billion. Exposure to China is limited to under 2% of volume. While still not a favourite of ours, we think there is enough here at the right valuation now to give it some more time.
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Premium contentWe reiterate PYPL, a leader in online payment systems, as a TOP PICK. The company is introducing AI into its platform for payments that could well be a game changer and renew their position as the market leader. It trades at 15x earnings (half its historical valuation), 3.2x book and supports a ROE of 22%. Cash reserves are once again growing while shares are aggressively bought back. We continue to recommend a stop at $57, looking to achieve $81 -- upside potential of 18%. Yield 0%
(Analysts’ price target is $80.94)Premium content
Revenue matched estimates and EPS was about 3% better ($1.24 vs $1.198).
PayPal is in the early stages of optimizing operating performance, with a margin turnaround in 3Q22 likely to lead improvement of about 125 bps in 2023.
This will be aided by slower non-transaction expense growth, which is on track to normalize to pre-pandemic levels.
Revenue growth could be faster than the mid-single-digit growth assumed in cost planning by management.
Cross-border volumes, after being impacted severely by the pandemic, could surprise on the upside, depending on the economy.
The strong growth in Braintree volumes, launch of a commerce platform (PCPP) for unbranded checkouts for small and medium businesses, conversion of existing customers to monthly active app users, and opportunities in offline payments should provide a long runway for revenue growth.
The worst is likely over for the stock, and it now looks attractively priced at 16X earnings.
The balance sheet remains very strong and cash flow generation is very solid ($6.2B last year, with $5.5B in free cash flow).
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