The S&P500 has hit one new all-time high after another in 2024, but not every stock has participated in the current bull market. Some stocks remain down, well below the highs of late 2021 and early 2022.
Some of the companies behind those stocks benefited from the behavioral changes brought about by the COVID-19 pandemic. But now that things are reverting back to how they were before the pandemic, they don’t look so attractive. Others, however, appear oversold, and their current valuations don’t reflect their true potential.
An example of the latter is PayPal (NASDAQ: PYPL). PayPal’s stock price rose as COVID-19 led to increased online and contactless sales. But a few bad quarters and a CEO change led to a massive sell-off in stocks. The stock is currently trading about 81% below the all-time high it reached in mid-2021. This is why it can be a great opportunity to buy some shares.
There are already signs of a turnaround
One of the biggest things that plagued PayPal over the past year was the decline in active accounts. Active accounts peaked in the fourth quarter of 2022 and have seen four consecutive declines in 2023.
But active accounts increased in the first quarter, by 2 million to a total of 427 million. While there is still a long way to go to get back to where it was at the end of 2022, the turnaround progress is encouraging.
The biggest driver of the decline in active accounts was the churn of inactive accounts in emerging markets in the Latin America and Asia Pacific regions. It is now growing by adding users who are spending money more and more. Total payment volume increased 14% year over year, despite fewer users than this time last year. The number of transactions per active account reached a record high of 60 last year.
The positive circle that ensures strong growth in involvement
The growing engagement of PayPal users speaks to its network advantage. On one side of the network are consumers and on the other side are merchants. The large consumer base that uses PayPal means that more merchants accept the digital wallet, and the growing number of merchants that use PayPal attracts more consumers to the platform. A growing number of merchants also gives existing users more opportunities to use PayPal.
There’s a good reason for merchants to choose PayPal, too. Not only does it add an additional payment option for some 400 million online shoppers, it also increases the likelihood that they’ll complete a transaction. The company reports a 33% increase in checkout conversions when the buyer uses PayPal instead of another payment method.
Although PayPal faces competition, none of its competitors have a user base on the scale of PayPal. This makes it virtually indispensable for online merchants.
That said, the intense competition can and has had a negative impact on PayPal’s ability to charge higher fees to merchants. It has also forced the company to give consumers more choice in its standard payments, rather than forcing them to pay with methods that were more lucrative for the company (such as cash balances).
Still, it’s hard to deny PayPal’s position as the leading digital wallet, putting it in a prime position for the continued growth of e-commerce.
The stock is an absolute bargain
The stock currently trades on a forward price-to-earnings multiple of less than 14x, which is incredibly low, even if you expect competition to erode revenue growth and margins.
Management’s updated guidance for full-year 2024 calls for earnings per share (EPS) growth in the mid-to-high single digits. PayPal should be able to generate double-digit revenue growth as it returns to year-over-year active account growth this year. While the unbranded checkout has weighed on gross margins, it is reducing costs in other areas, which should result in stable to growing operating margins. That could mean PayPal exceeds its current expectations for the full year.
In addition, PayPal is aggressively buying back shares at this price. It is forecasting $5 billion in free cash flow, and management plans to buy back more than $5 billion in shares this year. That will further boost 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 as a result of the factors mentioned above. With shares trading below 14x earnings, they represent an incredible bargain for investors.
Should You Invest $1,000 in PayPal Now?
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Adam Levy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends PayPal. The Motley Fool recommends the following options: short June 2024 $67.50 calls on PayPal. The Motley Fool has a disclosure policy.
1 Incredible Growth Stocks Down 81% You’ll Regret If You Didn’t Buy on the Dip originally published by The Motley Fool
