PayPal Holdings (NASDAQ:PYPL) is a well-positioned financial technology company, with strong growth momentum. However, the rich valuation means that it is not particularly attractive at the moment, and overall, I am neutral on the stock.
PayPal enables people to make and receive payments digitally, leveraging technology so that they can do it more conveniently. PayPal has been at the forefront of the digital-payment revolution for over 20 years, empowering people’s finances all over the globe.
The company’s mission is simple: to give people access to affordable, convenient, and secure products, on whatever device they choose. (See PYPL stock charts on TipRanks)
PayPal's Strengths
PayPal’s immense customer and merchant network makes it an attractive method for payments and financial transfers. It also is increasingly getting involved in cryptocurrencies and mobile banking, giving it substantial growth upside that it should be able to achieve, thanks to its established network of users.
Recent Results
PayPal posted $6.24 billion in revenue for the second quarter of Fiscal Year 2021, an 18.6% increase year-over-year. The company added 11.4 million net active new accounts (NNAs), increasing its overall total to 403 million active accounts.
PayPal's Valuation
PayPal enjoys a lengthy growth runway, but it still needs to grow into its valuation. While the company is profitable, its multiples remain fairly high.
The EV to forward EBITDA is high at 40.2x, and the forward price to normalized earnings ratio is 54.6x. Growth estimates are decent, but not great, as revenue is expected to grow by 20% in 2021, and 22.6% in 2022.
EBITDA is expected to grow by 24.2% in 2021 and 2022, and normalized earnings per share are expected to grow by 21.5% in 2021, and 25.3% in 2022.
Wall Street’s Take
From Wall Street analysts, PayPal earns a Strong Buy consensus rating based on 22 Buy ratings, three Hold ratings, and zero Sell ratings in the past three months. Additionally, the average PYPL price target of $336.91 puts the upside potential at 20.5%.
Summary and Conclusions
PayPal has a strong competitive position in the financial technology space, and is an emerging leader in payments, transfers, and mobile banking. It owns a massive network of users and merchants that it can easily leverage to expand into adjacent businesses.
Furthermore, Wall Street analysts are overwhelmingly bullish on the stock. The upside from the consensus price target is good, but not great, and the valuation remains pretty rich compared to expected growth rates. As a result, investors might want to keep their exposure limited.
Disclosure: On the date of publication, Samuel Smith had no position in any of the companies discussed in this article.
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