To The Moon

The price of PayPal stock has collapsed to its lowest levels since May 2018 amid the confluence of various negative catalysts including a shift in macroeconomic conditions and a fading pandemic tailwind.

So far this year, PYPL is accumulating a 61.5% loss – a percentage that is roughly twice as much as what the tech-heavy Nasdaq 100 index has shed during the same period.

It is hard to attribute the decline to just external variables such as an expected increase in interest rates in the United States or rising geopolitical tensions. In this regard, PayPal has also faced some company-specific negative developments.

For example, the company reported a slowdown in user growth in the fourth quarter of 2021. The management cited that the elimination of illegitimate accounts created for the sake of collecting rewards only was partly to blame.

In addition, the company cited thesupply chaincrisis as another factor contributing to the weak guidance it issued for 2022 as cross-border payment volumes are expected to suffer, primarily due to lower transactions with China-based suppliers.

Finally, inflation appears to be a concerning factor for PayPal as well as it could lead to a slowdown in consumer spending.

Overall, the environment is not favorable for the digital payments giant and headwinds abound. However, can this decline be an opportunity to grab some shares of one of the world’s most successful and widely-known payment platform?

In this article, we dig deeper into the latest price action and fundamentals of PayPal stock to outline plausible scenarios for the future.

PayPal Stock – Technical AnalysisThe chart above shows that the price of PayPal stock has been on a sharp downtrend since July 2021 as a fading pandemic tailwind started to threaten the company’s ability to beat its own comparables in future periods.

In addition, macroeconomic conditions in the United States started to deteriorate in the form of strong inflationary pressures that were expected to lead to interest rate hikes and a tighter monetary policy from the Federal Reserve.

Moreover, competition in the digital payments landscape is heating up with companies such as Block (SQ) and Stripe and solutions such as Apple Pay and Google Pay gaining more and more ground.

Even though PayPal’s financial results have not necessarily been hurt dramatically, the market appears to be pricing a severe slowdown in the firm’s future growth rates due to the confluence of these external variables and that, along with an increase in risk premiums, explains why the company’s valuation has suffered this much.

Thus far, the price of thistech stockis standing 76.6% below its 52-week high of $310.16 per share while it is also currently trading 56.2% below its 200-day simple moving average. This typically indicates that the market’s view of the firm’s mid-term prospects is fairly negative.

Momentum indicators are favoring a bearish short-term outlook for PayPal as the Relative Strength Index (RSI) is on a downtrend and has not managed to stay above 50 for more than a few days since August last year.

Meanwhile, the MACD remains in negative territory and just crossed below the signal line at the same time that histogram readings have turned negative.

PayPal (PYPL) Stock – A Closer Look at the Fundamentals

On a year-on-year basis, the number of active accounts for PayPal has been growing at a slower rate since Q4 2020. Back then, active accounts grew 24% compared to the previous year while in Q1 2022 this same metric grew 9%.

Meanwhile, transaction growth has also been on a downtrend, moving from a 28% year-on-year growth rate in Q4 2020 to 18% as of Q1 2022.

On the other hand, revenues and non-GAAP earnings per share have been relatively stable, with the latter ranging from $1.07 to $1.22 in the past 8 quarters while free cash flow margins have also ranged from 16% to 25% during that same period.

For 2022 and 2023, analysts estimate that revenues from PayPal should land at $28 billion and $33 billion respectively. Using an average FCF margin of 20%, that results in forecasted freecash flowsof $5.6 and $6.6 billion respectively.

At a market cap of $83.4 billion, this results in a forward P/FCF multiple of 12.6x. Considering that free cash flows are expected to grow at a rate of around 17% per year based on the estimate above, PayPal is either undervalued or fairly valued.

This makes the stock highly appealing from a fundamental perspective as other quantitative and qualitative elements are also favorable including the firm’s robust business model, a healthy balance sheet made up of just $8.22 billion in long-term debt and liquid reserves of over $7.9 billion, and a capable leadership team that has taken the business to where it is now.

Therefore, even though the technical outlook is relatively weak and is leaning toward a negative short-term outcome, the long-term prospects, from a fundamental perspective, are quite appealing as long as the firm can maintain – and grow at a slow but decent rate – its revenues and margins.

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