THE S&P 500 set one new all-time high after another in 2024, but not all stocks participated in the bull marketSome values ​​remain in decline, well below the peaks reached at the end of 2021 and the beginning of 2022.
Some of the companies behind these stocks have benefited from the behavioral changes brought about by the COVID-19 pandemic. But as the situation moves closer to where it was before the pandemic, they no longer look as attractive. Others, however, appear oversold and their current valuations do not reflect their true potential.
An example of the latter is Pay Pal (NASDAQ:PYPL). PayPal’s stock price surged as COVID-19 drove a surge in online and contactless sales. But a few bad quarters and a CEO change led to a selloff in the stock. The stock is currently trading about 81% below its all-time high set in mid-2021. Here’s why this could be a great opportunity to buy shares.
We are already seeing signs of a turnaround
One of the biggest factors weighing on PayPal over the past year has been a decline in its total active accounts. Active accounts peaked in the fourth quarter of 2022 and have seen four consecutive declines over the course of 2023.
But the number of active accounts increased in the first quarter, climbing by 2 million to 427 million in total. While there is still a long way to go to return to the level of late 2022, the progress made in this area is encouraging.
The main driver of the decline in active accounts was the churn rate of inactive accounts in emerging markets in the Latin America and Asia Pacific regions. It is now growing by adding users who spend more and more frequently. Total payment volume increased 14% year-over-year, despite fewer users compared to the same period last year. Transactions per active account over the past year reached an all-time high of 60.
The virtuous circle that promotes strong growth in engagement
PayPal’s growing user engagement signals its network advantage. On one side of the network are consumers and on the other side are merchants. The massive consumer base using PayPal is attracting more merchants to accept the digital wallet and the growing number of merchants using PayPal is attracting more consumers to the platform. A growing number of merchants are also offering existing users more opportunities to use PayPal.
There are also good reasons for merchants to choose PayPal. Not only does it add another payment option for an estimated 400 million online shoppers, it also makes them more likely to complete a transaction. The company reports a 33% increase in payment conversions when the buyer uses PayPal versus another payment method.
Although PayPal faces competition, none of its competitors have a user base the size of PayPal. This makes it practically indispensable for online merchants.
That said, fierce competition can and has weighed on PayPal’s ability to charge higher fees to merchants. It also pushed the company to offer more choices to consumers when it comes to default payments, instead of forcing them to pay using methods more lucrative for the company (like cash balances).
Still, it’s hard to deny PayPal’s position as the leading digital wallet, putting it in prime position for the continued secular growth of e-commerce.
The action is a real bargain
The stock is currently trading at a forward price-to-earnings ratio of less than 14x. That’s incredibly low, even though competition is expected to reduce its revenue growth and margins.
Management’s updated guidance for the full year 2024 calls for earnings per share (EPS) growth in the mid-single digits. PayPal should be able to generate double-digit revenue growth by returning to annual active account growth this year. While non-branded payments have weighed on its gross margin, the company is cutting costs in other areas, which should translate into flat to growing operating margins. This could mean PayPal beats its current full-year guidance.
Additionally, PayPal is buying back its stock massively at this price. The company is forecasting $5 billion in free cash flow, and management plans to repurchase another $5 billion in stock this year. That provides an additional boost to earnings per share.
Wall Street analysts currently expect PayPal to grow its earnings per share at a compound annual rate of nearly 16% over the next five years, due to the above factors. So, with the shares trading at less than 14 times earnings, they represent an incredible bargain for investors.
Should You Invest $1,000 in PayPal Right Now?
Before you buy stocks on PayPal, consider this:
THE Motley Fool, Securities Advisor The team of analysts has just identified what it believes to be the 10 best stocks Investors should buy now…and PayPal isn’t one of them. The 10 selected stocks could generate monstrous returns in the years to come.
Consider when Nvidia I made this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $757,001!*
Securities Advisor provides investors with an easy-to-follow blueprint for success, including portfolio construction advice, regular analyst updates, and two new stock picks each month. Securities Advisor the service has more than quadrupled the return of the S&P 500 since 2002*.
*Stock Advisor returns as of June 24, 2024
Adam Levy has no position in any of the stocks mentioned. The Motley Fool posts and recommends PayPal. The Motley Fool recommends the following options: Short June 2024 calls at $67.50 on PayPal. The Mad Motley has a disclosure policy.
1 Incredible Growth Stock Down 81% That You’ll Regret Not Buying During The Dip was originally published by The Motley Fool
