Buying now could be a no-brainer for a historically successful stock.
After the COVID-19 pandemic shut down much of the world in March 2020, consumers moved to various forms of digital payments. PayPal $PayPal(PYPL)$ was one of the primary benefactors of this movement, and its stock price reached a high of $310 in July 2021 from investor excitement. After growth began to slow and pandemic-era stocks fell out of favor, shares tumbled over 60% to around $115 -- a price last reached in April 2020.
Investors may be significantly underwater depending on when shares were purchased and wondering if it's worth holding on to the company. I believe the market reaction is significantly overblown and PayPal could be a great stock to own over the next three to five years.
Total payment volume continues to rise
Throughout 2021, total payment volume (TPV) across all PayPal platforms -- like PayPal itself, Venmo, and Zettle -- rose 33% to $1.3 trillion. Prior to the pandemic in 2019, PayPal only processed $712 billion. PayPal generates revenue by taking a fraction of every payment processed, so this 76% increase means PayPal is producing a lot more revenue.
However, its take rate -- how much revenue it generates from each transaction -- has fallen significantly from 2.49% in Q4 2019 to 2.04% in Q4 2021. Much of this pressure can be attributed to higher currency exchange fees and PayPal losing eBay's business as the company's primary payment processor. While this margin creep is likely permanent, if PayPal can stabilize its take rate around 2%, investors shouldn't be concerned.
PayPal also has a massive tailwind blowing in its favor: inflation. If products cost more, PayPal's TPV will rise accordingly. One caveat to this assessment is the assumption of continued consumer spending. If consumers cope with inflation by not purchasing as many products to keep their overall spending the same, PayPal won't see a large TPV expansion. With management guiding 19% to 22% TPV growth throughout 2022, investors should have confidence in PayPal's continual growth.
PayPal is focusing on quality over quantity customers
One of the main criticisms of PayPal has been how management has handled account growth projections. Throughout 2021, management often cited its goal to have 750 million active accounts by 2025. Without the projection even aging one year, management revoked it. After adding 72.7 and 48.9 million net new active accounts in 2020 and 2021 respectively, PayPal expanded its user base to 426 million active accounts as of Dec. 31, 2021. Yet it only believes it will add between 15 million and 20 million accounts during 2022.
With slowing user growth, PayPal will need to rely on existing customers using its products more. Management noted the mass of customers it acquired through different incentives didn't affect TPV and also led to high churn rates. PayPal will now be focusing on deepening customer engagement and increasing its revenue per user.
To judge how PayPal is succeeding with this initiative, investors should keep an eye on customer transactions and average transaction size.
While average transaction size didn't see much growth over 2021, this number may creep up if PayPal can become front of mind for large purchases. In a similar fashion, investors should watch if active transactions per account rise to see if consumers are utilizing PayPal's ecosystem more. If both of these metrics keep trending in a positive direction, it will justify PayPal's strategy of deepening customer engagement.As PayPal's ecosystem of products expands and its platform becomes a more integral part of consumer finances, I believe PayPal can deliver growth in these two key metrics.
An attractive valuation
After the sell-off, PayPal is trading at a valuation rarely seen since its spinoff from eBay in 2015, as the chart shows.During its lowest valuation point in 2016, PayPal traded for about 32 times earnings and 20 times free cash flow. PayPal now finds itself in a similar valuation band, so investors should take advantage of this valuation. Furthermore, the current 32 P/E isn't a bad price to pay for a stock when compared to other tech companies.
One downside is management's FY 2022 projection of negative to flat earnings growth. From a GAAP (generally accepted accounting principles) standpoint, management expects earnings to fall around 13% and non-GAAP earnings to grow 1.6% at the midpoint. This isn't great news for shareholders,but CFO John Rainey addressed this guidance during PayPal's Q4 2021 conference call by stating management was "taking a more conservative 2022 outlook." He also noted that 2022's lower growth will not affect PayPal's medium-term goal of 22% annual earnings per share growth through 2025 as laid out in their 2021 investor day presentation.
2022 may not be the year PayPal's stock recovers, but the business is still on solid footing when assessing it from a five-year holding period mindset. Waiting for the perfect time to buy a stock rarely occurs, and most stocks make substantial moves months before good news becomes mainstream. If you believe in PayPal for the long term, today presents a great investment opportunity -- just don't expect to make quick money here. This is a company with multi-year growth aspirations, so investors should be willing to hold the stock for a similar time period.
Source:The Motley Fool
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