PayPal's Stock: A Potential Turnaround Story

Large Caps 6 replies 0 votes 1015 views Tags:  CEO TransitionDigital PaymentsE-commerce growthfinancial outlookinvestment analysisPayPal stockvaluation metrics

As of September 4, 2023, PayPal Holdings, Inc. (PYPL) has witnessed quite a rollercoaster ride in its stock price. It soared to impressive heights, peaking around $300 in 2021 during the COVID-induced online shopping frenzy. However, as normalcy returned, the stock experienced a significant dip. The good news is, it seems to be on the path to recovery and the beginnings of a new uptrend.

What's piquing my interest in PayPal's stock is the potential for a strong turnaround. The valuation is currently attractive, and the anticipated growth in revenue and earnings exceeds the industry average. Moreover, from a technical standpoint, the stock is at a bullish turnaround level, setting the stage for potential positive momentum.

The New CEO and Fresh Perspectives

One significant factor that could fuel PayPal's resurgence is the incoming CEO, Alex Chriss, set to assume the role on September 27, 2023. Chriss has a track record of success, having previously served as the Executive Vice President and General Manager of Intuit's Small Business and Self-Employed Group. Under his leadership, Intuit experienced a 20% increase in customers and a 23% growth in revenue. He also orchestrated Intuit's $12 billion acquisition of Mailchimp, expanding its business capacity and customer base significantly.

Chriss's fresh perspective and leadership style could unlock new sources of revenue for PayPal. This might involve expanding services to existing customers, attracting new ones, and exploring potential acquisitions. Overall, his appointment is poised to be a positive catalyst for both PayPal's business and its stock.

Riding the Wave of Digital Payments Growth

PayPal is well-positioned to benefit from the long-term growth of digital payments. The digital payments market is expected to grow by approximately 14% annually, reaching a staggering $5,848.5 trillion by 2030. This robust growth is expected to act as a strong tailwind for PayPal's online payment services.

To further strengthen its position, PayPal is strategically investing in three key areas: branded checkout, merchant solutions, and digital wallets. These initiatives are pivotal in PayPal's quest to expand its market share in the e-commerce landscape while also enhancing its margin dollar growth. If executed successfully, this strategy could lead to significant revenue and earnings growth, fueled by the ongoing expansion of the e-commerce sector.

Anticipated Growth

From a financial standpoint, PayPal is expected to chart an above-average growth trajectory over the next couple of years. Projections indicate revenue increasing by approximately 8% in 2023 and 9% in 2024, while earnings are expected to rise by around 20% in 2023 and 14% in 2024. Looking further ahead, the expected 3- to 5-year average annual earnings growth rate stands at about 17%. If these expectations are met or exceeded, they are likely to have a positive impact on the stock.

Technical Perspective

Examining the technical indicators, PayPal's daily stock chart reveals a promising picture. The bullish crossover of the blue MACD line above the red signal line signifies a confirmation of a bullish reversal. Additionally, the RSI has been steadily increasing from near oversold levels. A crossing of the RSI above the 50 level would indicate strong positive momentum, likely leading to further gains for the stock.

Given the company's recent performance and if it continues to meet or exceed earnings expectations in the coming quarters, I anticipate the stock reaching the resistance level at $76 within approximately six months. We've seen similar movements in the recent past, and if conditions remain favorable, surpassing the $76 mark in 2024 could be within reach.

Attractive Valuation

PayPal is currently trading at a forward PE ratio of just under 13x, which is below the forward PE of 18x for the Credit Services industry. Another valuation metric to consider is the PEG ratio, which incorporates the 3- to 5-year earnings growth rate. PayPal boasts a low PEG ratio of 0.77, a range typically associated with undervalued growth companies. With such an attractive valuation, there seems to be significant potential for the stock to rise.

Risks to the Investment Thesis

While the outlook appears promising, it's essential to acknowledge potential risks. Competition remains a constant threat for PayPal, with traditional bank debit cards, credit cards, and various digital payment alternatives vying for consumers' attention. PayPal's success hinges on its ability to retain and attract customers in the face of stiff competition. Changes in consumer payment behavior could result in a loss of market share.

Additionally, shifts in government regulations pertaining to online payments could pose challenges. Stricter regulations or higher taxes may impact the company's ability to expand its market share and could negatively affect its services.

The Long-Term Outlook

In my assessment, PayPal's long-term outlook is positive. Its current valuation, coupled with its bullish technical indicators, presents ample upside potential for the stock. Concerns about competition may be overstated, as PayPal already enjoys a first-mover advantage and a substantial market share in online payment processing. With over 426 million active PayPal accounts, it's a trusted brand with a track record of serving consumers for years.

Analysts have set a one-year price target of $86 for the stock, representing a 35% increase from its current price. Even at that level, PayPal's forward PE would remain below the industry average. Therefore, I view PayPal as an attractive buy-the-dip opportunity, with a promising future ahead.

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