PYPL Stock Forecast: New Breath

Sergey Okun  This PYPL stock forecsat article was written by Sergey Okun – Senior Financial Analyst at I Know First, Ph.D. in Economics.

Highlights

  • The revenues of PYPL have increased by almost 8.2% over the last year driven primarily by growth in total payment volume.
  • PayPal is implementing measures to innovate its products and business processes.
  • We are taking a long position with a target price of $85.
(Source: flickr.com)

Overview

PayPal stands as a leading provider of online payment solutions, facilitating seamless and secure transactions for both consumers and businesses. At the forefront of its growth is Venmo, a peer-to-peer payment service driving increased total payment volume. With its PayPal and Xoom products, the company offers domestic and international person-to-person payment services. Operating in over 200 markets, PayPal enables customers to send payments worldwide, backed by partnerships with financial institutions globally. Moreover, PayPal supports withdrawals from bank accounts in 56 currencies and holds balances in 25 currencies, with fund transfers available in over 100 currencies. Based in San Jose, CA, the company benefits from strategic acquisitions such as Hyperwallet, Braintree, and iZettle, enhancing its payment offerings for a better user experience.

PYPL Stock Forecast: Refresh the Business

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The revenues of PayPal have increased by almost 8.2% over the last year, driven primarily by growth in total payment volume, reaching $2,253 million in 2023. The primary source of the company’s revenue is transaction revenues, constituting 90% of the total revenue in 2023. The main geographic region is the U.S., accounting for 58% of the revenue structure.

(Figure 1: The Revenue Structure)

According to GuruFocus, PYPL demonstrates mixed performance in the credit services industry. The company achieves a commendable Return on Equity (ROE) at 21.11%, Return on Assets (ROA) at 5.46%, and Return on Investment Capital (17.73%), surpassing that of 89.47%, 81.04%, and 93.43% respectively of companies in the industry. While other profitability margins may not appear as impressive, the company utilizes share buyback as a method to distribute funds among shareholders. The company holds a high 9/10 profitability rank according to GuruFocus.

*Source: GuruFocus.com
(Figure 2: PYPL vs Credit Services Industry in TTM on April 4th, 2024)

The Altman Z-score, which determines the result of a credit test, stays near the bored of the Distress and Grey zones. At the same time, PYPL looks interesting in terms of the Piotroski F-Score. Piotroski F-score is a number between 0 and 9 that is used to assess the soundness of a company’s financial position. A score of 8 may indicate that the company’s financial situation is a very healthy situation.

*Source: GuruFocus.com
(Figure 3: Piotroski and F-Score)

The top management is being updated, 6 positions have been updated in 4 months. Today PayPal is actively focusing on innovation of its products and business processes. The following innovations are expected to begin spreading in the United States in 2024

Transforming Checkout

Checkout is crucial for both merchants and consumers, yet any friction can disrupt this final interaction. PayPal has enhanced the checkout process significantly, offering faster transactions, passkeys for easy login with face or fingerprint, and reduced latency by up to 50%. These improvements enable customers to check out twice as fast while maintaining the same level of security. Additionally, AI integration ensures ongoing enhancements to the checkout experience.

Introducing Fastlane by PayPal

Merchants face lost sales due to slow and cumbersome guest checkout processes. PayPal offers a solution called Fastlane, enabling one-click guest checkout. Customers save their information to check out in a single tap, without the need for passwords or updating personal data. Early trials show significant improvements, with Fastlane recognizing 70% of guests and speeding up checkout by nearly 40%.

Introducing PayPal Smart Receipts

PayPal introduces Smart Receipts, providing personalized recommendations and cashback offers to customers based on their purchase history. This feature aims to boost customer engagement and repeat shopping for merchants. Leveraging AI, PayPal offers hyper-relevant suggestions tailored to individual shopping behavior, expanding opportunities for businesses of all sizes.

Introducing PayPal Advanced Offers Platform

PayPal is creating a personalized offers platform for merchants, using customer insights to tailor promotions based on actual purchase history. This platform, driven by AI, can tap into vast transaction data and offers a pay-per-performance model. Customers will benefit from more relevant offers and rewards. Additionally, PayPal is developing user-friendly privacy controls for customers to opt in or out of data sharing with merchants for personalization.

Reinventing the PayPal app

PayPal is enhancing its app with CashPass, offering personalized cash back deals from top brands in the U.S. Users can access these offers by simply tapping on them, shopping, and checking out with PayPal. CashPass uses AI to tailor offers based on shopping behavior, providing regular new deals to users. Launching in March, CashPass will feature partners like Best Buy, eBay, McDonald’s, and more. Users can also combine CashPass rewards with other PayPal incentives, like cash back from the PayPal Cashback Mastercard®, and further increase savings by depositing cash back into a PayPal Savings account.

Introducing the Next Generation of Venmo Business Profiles

Venmo’s business profiles, introduced in 2021, cater to over 90 million active accounts, providing affordable payment solutions for small businesses. Now, enhanced profiles offer subscribe buttons, rankings, and promotional tools, empowering businesses to boost visibility and sales. Consumers benefit from discovering top-ranked businesses within their network, enjoying cashback deals for local support. Venmo’s active social feed revolutionizes real-time offers and promotions at a hyper-local level, with privacy controls akin to PayPal.

PYPL Stock Forecast: Place of Value

Let’s examine the next comparable companies: ADYEY, SQ, FI, FIS, and GPN. The price-to-book (P/B) ratio for PYPL is 3.33 which are higher compared to the median number. Conversely, the price-to-earnings (P/E), price-to-sales (P/S), and the price-to-cash flow (P/CF) ratios of 17.02, 2.42, and 14.46 are lower than the median figures as of April 4, 2024.

(Figure 4: Price Ratios)

Based on the information above, PayPal’s estimated stock price falls within the range of $55.82 to $192.60. This range gives us a target PYPL stock price of $106.24 or P/E ratio at 28.02, which is higher than the current price of $64.54 on April 4th, 2024.

(Figure 5: The Relative Valuation of PYPL)

Let’s examine the fundamentals more carefully to either support or refute our conclusion about the current underestimation of PYPL’s stock. Currently, PYPL has the lowest 3-year and 5-year EPS without NRI Growth Rate, confirming the lowest P/E ratio among its peers. However, when we consider the Five-Year EPS Growth Forecast, we notice that PYPL’s forecasted growth rate of 19.8 outperforms expectations for FIS, FI, and GPN, which have significantly higher P/E ratios at 85.42, 31.66, and 33.71 respectively. A lower Beta number for FI, FIS and GPN could explain the differences in P/E between PYPL and these companies, but the disparity between FIS and PYPL appears too significant despite the fact that FIS has a high dividend payout ratio.

Additionally, the disparity in the 5-year EPS Growth forecast between PYPL and ADYEY is not significant enough to justify the huge difference in market evaluation based on P/E ratios, especially considering they have relatively the same level of risk. Moreover, while ADYEY does not allocate money to shareholders, PYPL utilizes buybacks to provide cash to its shareholders.

(Figure 6: Fundamental Parametres)

According to our analysis, there is a mispricing in the current PYPL stock price, but the level at $106.24 per share looks a little bit high, and the target price at $85 for PYPL stock forecast seems more justified, which determines a P/E ratio of 22.4. Also, this P/E estimation does not seem too high compared to its historical numbers. The average historical P/E value from June 30, 2016, to December 31, 2023, is 46.94. Without taking into account the period of pandemic boom in 2020-2021, the average number is 40.41.

(Figure 7: Historical PYPL’s P/E Values)

PYPL Stock Forecast: What are Other Analysts Saying?

(Figure 7: Market Estimation)

Based on data sourced from Yahoo Finance, the analyst consensus aligns with the valuation. The overwhelming majority of analysts rated the stock as Buy (41%) or Strong Buy (32%), with the remaining analysts (27%) ranking the stock as Hold, and the average price target is $70.57.

PYPL Stock Forecast Conclusion

I am taking a buy-side position on PYPL stock with a target price of $85, which promises around a 31% return. The company demonstrates mixed performance in the credit services industry. However, today, PayPal is implementing measures to innovate its products and business processes aimed at personalizing needs based on artificial intelligence for both sellers and consumers. These measures should improve the company’s future financial results.

It is worth paying attention that the stock-picking AI of I Know First has a weak signal on the one-year market trend forecasts, supporting my position for the PYPL stock forecast. The light green for all forecasts is a weak bullish signal.

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