The war on cash, a phrase that refers to the shift from physical currency to digital payments, is in full motion. By 2030, the mobile payment market is forecast to reach $588 billion, equal to a compound annual growth rate (CAGR) of 35.3% from 2022, according to Grand View Research. Understanding that secular trend, prudent investors should be very intrigued after having watched the Nasdaq Composite tumble 21% since the start of the year.
With many financial technology (fintech) stocks now trading at record lows, long-term investors have many promising buying opportunities. One company in particular, PayPal Holdings (NASDAQ: PYPL), has grabbed my attention of late. The fintech giant is not only highly profitable and cash-flow positive, but it also reigns over 50.3% of the online payment processing environment. And despite its top-end positioning in a massive secular growth market, the company has shed 53% of its value year to date.
Let’s dive into PayPal’s situation and determine whether it’s a smart investment right now.
What’s new for PayPal?
On July 27, PayPal’s’s shares rallied more than 10% after news surfaced that an activist investor, Elliott Management, has been steadily accumulating the stock. It’s suspected that the investment firm plans to take a large stake in the company so that it can expedite PayPal’s cost-cutting measures. While this could be interpreted as positive news for the mobile payment firm, I’d rather focus on the underlying fundamentals of its business.
Per its first-quarter earnings report, the company’s total sales grew 7.5% year over year to $6.5 billion, and its diluted earnings per share contracted 27.9% to conclude at $0.88. Typical of many fintech companies today, management cited a host of reasons why growth is slowing, most notably softness in e-commerce, eBay‘s (NASDAQ: EBAY) continued transition to its own payment platform, and runaway inflation that is damping consumer spending.
Regarding other key metrics, PayPal’s total payment volume (TPV) rose 13.1% to $323.0 billion, and it added 2.4 million new accounts during the quarter to bring its total to 429 million.
Investors should anticipate a bumpy ride for the remainder of 2022 — Wall Street analysts estimate the company’s total revenue will climb 11.1% year over year, up to $28.2 billion, and its earnings per share to decline 16.3% to $3.85. The narrative should improve next year, however, with analysts forecasting top- and bottom-line growth of 16% and 23.1%, respectively. PayPal is set to disclose its second-quarter earnings report today.
Do I recommend buying PayPal today?
For several reasons, I urge investors to consider buying PayPal stock right now. First, unlike much of its competition, the company has proven to be extremely profitable and cash-flow positive, generating $1.1 billion in free cash flow (FCF) in its first quarter alone. Second, PayPal is a dominant force in a rapidly growing market, and the company continues to diversify its business with offerings like peer-to-peer payment platform Venmo and a buy now, pay later option. Lastly, the stock has a price-to-earnings multiple of about 29 at the moment, a hefty discount to its five-year average of more than 57.
It’s clear that many investors have temporarily fallen out of love with this fintech juggernaut, but that doesn’t mean wise investors should shy away today.
Luke Meindl has positions in PayPal Holdings. The Motley Fool has positions in and recommends PayPal Holdings. The Motley Fool recommends Nasdaq and eBay and recommends the following options: short July 2022 $57.50 calls on eBay. The Motley Fool has a disclosure policy.