One of the most well-known names in digital payments, PayPal (NASDAQ:PYPL) Holdings (PYPL, Financial) has had a tough few years but is finally seeing a turnaround. Investors have been less than enthusiastic about its shift toward lower-margin unbranded payments and declining take rate, but that is only part of the story.
As CEO Alex Chriss brings PayPal back on track, he is making smart, strategic moves. The early results are promising and the inside signals confidence with better margins, good user engagement, and a massive buyback.
However, PayPal still seems very undervalued compared to its peers. Now that e-commerce is expanding and digital payments are more important than ever, the company has a good chance to rebound and the market might be underestimating it.
PayPal's Q4 earnings: A solid performance, but the market had other plans
While Wall Street may not have seen it the same way, PayPal's fourth-quarter 2024 earnings showed a company that was and is continuing to make steady progress in its turnaround. Revenue grew 4% year-over-year (YOY) to $8.4 billion, slightly better than the estimated $8.3 billion, as well as non-GAAP EPS increased 5% to $1.19, both pointing towards resilience. However, the market zeroed in on the negative, including a 17% drop in GAAP operating income and lingering questions about Braintree's growth causing an 11.4% stock drop.On the whole, this reaction seems a little too dramatic. Global Total Payment Volume (TPV) increased 7% to reach $437.8 billion, and active accounts increased to 434 million, demonstrating how strong PayPal's user engagement is. Meanwhile, CEO Alex Chriss is leading the company toward long-term transformation by making branded checkout stronger and price-to-value strategy more refined while Venmo monetization gets accelerated.
Why PayPal's growth story is bigger than the stock reaction?
Investors may have been caught up in short-term concerns, but PayPal is upon a much larger opportunity with the ongoing growth of e-commerce. E-commerce, which is projected to grow from $4.4 trillion in 2023 to $6.8 trillion by 2028, doesn't have the same buzz as artificial intelligence or EVs. However, as online shopping continues to grow, so too does the need for digital payments, which PayPal is certainly set to take advantage of.Especially, Venmo is turning into one of its biggest growth engines. Alex Chriss isn't treating it as a mere peer-to-peer app but is turning it into a full-blown commerce tool. The number backs it up. Pay with Venmo and the Venmo Debit Card grew 20% and 30%, respectively, in Q4. More than that, PayPal is looking into in-app ads, retailer partnerships, and even international expansion to a market where a fragmented P2P payments market has huge potential globally.
Venmo has gone beyond convenience and is becoming a major revenue stream. In an online world that's expanding by the day, PayPal is paving the way to lead the next wave of digital payments.
PayPal bets on itself with a $15 billion buyback
Management is clearly speaking with a vote of confidence when it comes to PayPal's newly announced $15 billion share repurchase program. It has been a company that has prioritized shareholder return, as shown by its 3-year average buyback ratio of 5.3 and 8.32% shareholder yield, both above industry norms. PayPal is aggressively buying back shares, not just reducing share count, but also increasing EPS and showing faith in its long-term strategy. Despite market skepticism, it shows that PayPal is confident that its transformation will be the source of sustainable growth. When a company is willing to bet on itself at this scale, it's a sign worth noting.Strong growth at an undeniable discount
PayPal's valuation still doesn't reflect the market's belief in its growth trajectory, despite its growth being solid. The consensus revenue is expected to grow from $33.1 billion in 2025 to $48.5 billion in 2030 and EPS is expected to increase from $5.03 to $9.48. Yet, PayPal trades at only 15.5 times forward earnings, a multiple that drops to single digits by 2029. Low valuations mean the company's aggressive buyback program takes on even more meaning as it sharpens EPS growth and compounds shareholder value.Source: Paypal's earnings estimates (Seeking Alpha)
Once you understand PayPal's fair value estimates, this disconnect becomes even clearer. While the current stock price is $78.62, intrinsic value models like discounted cash flow (DCF) and median price to sales indicate a fair value well above $150. The stock is even more conservative with its projected free cash flow, which pegs the stock at $98.07. Long-term investors could profit as the mispricing is corrected in the market with PayPal repurchasing shares at a steep discount.
PayPal's valuation advantage compared to peers
PayPal seems to be in a good spot when it comes to valuation relative to its peers. At 16.2 times, its forward GAAP price-to-earnings ratio is much lower than Fidelity National Information Services (NASDAQ:III) (FIS, Financial) at 23.85 times and Corpay (CPAY, Financial) at 22.77 times. This implies that PayPal's stock is undervalued compared to its earnings potential.The price-to-sales ratio has a similar trend. At 2.54 times, PayPal is cheaper than both FIS at 3.80 times and CPAY at 6.84 times, so investors are paying less per dollar of revenue.
More evidence comes through the enterprise value metrics. PayPal's EV-to-EBITDA multiple of 10.93 times is slightly below FIS at 11.02 times, and well below CPAY at 14.04 times, which indicates superior value based on earnings. In the case of EV-to-sales, PayPal comes in at a very poor 2.38 times, compared to CPAY's 7.59 times and FIS's 4.54 times.
Source: Author generated based on historical data
Taking all this into account, PayPal's valuation metrics indicate that it's a stock that's attractively priced relative to its peers and has solid earnings potential at a discount.
How much more upside can we expect?
Although the stock has dropped 36.33% over five years, PayPal is making a comeback, up 34.4% in the past year. This is about the push and pull investors are struggling with, that is, short-term recovery versus long-term underperformance. Therefore, is this just a temporary bounce or is there a real upside left?The price target for Wall Street's 12 months is $94.80, about 20.98% higher than the current price. However, that projection seems conservative considering PayPal's improving fundamentals, aggressive share buybacks and strong cash flow generation. EPS continues to rise while the company cuts its share count which creates a compounding effect it isn't fully reflected in analysts' estimates.
Additionally, PayPal's transformation under CEO Alex Chriss has not yet fully been priced in. If execution stays on track, such efforts could drive sustained revenue and earnings growth beyond the market's current expectations.
That said, I set my 12-month price target at $105 for the stock. It factors in the company's higher margins, accelerating buybacks and the possibility of a valuation re-rating as the investor sentiment changes. And if PayPal continues to deliver properly, this overlooked fintech company could highly surprise a lot of people.
Risks to my thesis
While I am bullish on PayPal's turnaround, it is worth noting risks that could be its setback.First, competition is heating up and PayPal is not only competing with usual fintech players, like Block (XYZ, Financial) or Stripe. Visa (NYSE:V, Financial) and Mastercard (NYSE:MA, Financial), the big guns, are pushing further into digital payment, and tech giants like Apple (NASDAQ:AAPL, Financial) and Google (NASDAQ:GOOGL, Financial) are making strong moves with their payment platforms. PayPal will miss the mark if it doesn't stand out, and will risk losing customer transaction volume to these heavyweights.
Regulation is another wildcard. PayPal is larger, so it's more scrutinized than smaller players. Recently, regulators have been willing to get in there to cap card fees for Visa and Mastercard. Compliance costs may rise if the same rules are applied to PayPal's fees, reducing margins even more.
Then there is security, a place where trust is a priority. Just last month, PayPal weathered multiple cyberattacks to remind us how digital payments remain a prime target. Although it did a good job handling the situation, any major breach could erode user confidence.
Finally, execution risk looms large. CEO Alex Chriss has big ideas, but it won't happen overnight for Venmo to become a revenue powerhouse and branded checkout to be overhauled. PayPal can't afford to stumble as the market will not be merciful.
Your takeaway
In conclusion, PayPal's Q4 earnings may not have wowed Wall Street, to say the least, but the bigger story here is more exciting. The company is being proactive and making an effort to move in a more profitable direction, using its massive user base to its advantage. Despite the knee-jerk reaction of the market notwithstanding, PayPal's fundamentals are improving and its long-term prospects in digital payments are strong.Sure, there are risks. Regulation issues are real, competition is fierce, and execution needs to be spot on. However, with a solid strategy under CEO Alex Chriss, PayPal appears to be on the verge of a comeback.
The stock is a great risk/reward setup at its current valuation. This could be one of the more underrated comeback stories for fintech if the company keeps up its amazing performance. Investors who are prepared to ignore the noise of the short-term might just be getting in at a bargain.
This content was originally published on Gurufocus.com
