PayPal's stock price is undervalued, so don't miss the perfect bottom cut opportunity

PayPal's valuation is very attractive, and its price-earnings ratio is extremely low compared to historical averages and revenue and earnings growth.

The company is committed to reshaping the business, improving innovation capabilities and cost efficiency.

The revenue growth potential of Venmo and its debit card wasn't fully taken into account in PayPal's valuation.

I expect PayPal to perform well in 2025.

I first reported on PayPal (NASDAQ: PYPL) at the end of December and gave it a “strong buy” rating. I thought the bullish reasons were very compelling, while the bearish reasons were gradually disintegrating. Next, I gave another “Strong Buy” rating in my earnings assessment after the fourth quarter report. Although the company lagged behind S&P in both time periods, and the stock fluctuated in a range for several months, my confidence in the value shown by the stock remained strong. I reaffirm my “Strong Buy” rating for the reasons discussed below.

It's really disheartening to keep investing in underperforming stocks while watching AI stocks rise rapidly. I understand the disappointment of many investors and bullish analysts at this company.

But I'm sure investors who are patient with PayPal will be well rewarded for years to come. Despite many signs of optimism, the business's current pricing is based on the most pessimistic expectations.

First, PayPal's valuation is still very attractive. The company's compound annual revenue growth rate for the past five years was 13.87%, and the compound annual profit growth rate was 14.41%. However, the share price fell by nearly 44% over the same period.

The current non-GAAP price-earnings ratio for the stock is 14.9 times, compared to a five-year average of 32.7 times. The current market capitalization is $64.42 billion, which is equivalent to a sales multiplier of only 2 times, compared to a five-year average of 6.5 times. This undervaluation indicates market concerns about long-term growth. Recently, the unbranded processing business is eating away at the TPV share of the brand, which has led to a gradual decline in the acquisition rate. This trend is reflected in PayPal's gross margin, which is currently 11.5% below the five-year average and 33.9% lower than the industry median.

The company reported revenue of $29.7 billion in 2023, up only 8.19% year over year, while the low-margin unbranded payment processing business continued to seize share from branded buttons. Brand payments are growing at an annual rate of only 7%, while Braintree (PSP/Unbranded) is growing at 26%. Venmo grew 8% but is still not fully monetized.

The TPV mix's inclination towards the PSP sector is at the heart of the bearish reason. Slowing brand checkout growth remains a threat to sustainable profit growth. Meanwhile, brand payments and Venmo's medium to high single-digit revenue growth have been unsatisfactory. Why is this happening and what is management doing to fix this?

The main reason is that brand buttons face intense competition, and Apple (AAPL) Pay in particular remains a strong competitive threat.

Apple Pay has caught the attention of regulators. Apple's current iOS 17.4 has undergone a major update, and the NFC (Near Field Communications) chip is open to third-party apps in the European Economic Area. This means PayPal can natively build its own digital wallet in its iPhone app and take advantage of iPhone's NFC functionality without relying on Apple Wallet. This will enable the company to obtain a larger share of the acquisition rate on mobile payments.

But that doesn't completely solve the problem. The PayPal button lags behind some competitors as the company has lost its innovative edge in recent years.

Venmo, on the other hand, faces a fundamental problem: 80% of the $180 billion in average monthly new inflows left Venmo within 10 days. Apparently, 60 million monthly active users only see Venmo as a tool to send money to friends. PayPal needed to change this brand image to achieve sustainable long-term profitable growth.

CEO Alex Chriss is taking a prudent approach to addressing these issues.

He said 2024 was a year of reinventing the company, and the results are already beginning to show. The executive team has been restructured, and the new team is focused on two areas: 1) reigniting the innovation engine, and 2) improving cost efficiency.

Chris' first major move as CEO was the First Look event, which launched 6 new innovations that will enter the PayPal ecosystem, including biometric authentication at checkout, more cashback offers, and a guest checkout process. The market reacted lukewarm to the First Look campaign, and the disappointment was even greater when Chriss weighed down first-quarter guidance in the fourth quarter report. In his recent report, he also gave disappointing guidance:

Single-digit growth was mediocre in the quarterly and full-year results guidelines, but it is worth noting the “at least” $5 billion share repurchase plan. At the current price of $61.64, this equates to roughly 81 million shares. Currently, the total number of shares outstanding in the company is 1.06 billion, which means that the number of outstanding shares will decrease by approximately 7.6% in fiscal year 2024.

Furthermore, PayPal's cash holdings exceed total debt, so using the full annual free cash flow for share buybacks at current valuations is an efficient use of capital for investors.

At the same time, despite steady growth in the company's revenue and earnings per share, operating expenses were fairly well controlled:

The company is cutting 7% of its workforce and conducting a comprehensive review of existing operations to improve cost efficiency. Even if gross margin continues to decline, the company can maintain a stable or moderate increase in operating profit margins. Stable operating margins and share buybacks contribute to good earnings per share prospects. Despite this, in order for stocks to turn around in the face of recent poor performance, the company needed to raise gross profit margins again.

The company expects to achieve this goal by 2025. For the rest of 2024, we can look forward to improvements in existing businesses (such as improvements to Xoom), selling bad businesses, and continuing to reduce operating expenses. I don't expect a significant increase in acquisition rates in 2024, but this is critical for long-term growth in 2025. The decline in acquisition rates was the most worrying part of the first-quarter report.

Alex Chriss is leading the company in the right strategic direction. PayPal is focused on increasing pricing power through Braintree, using guest checkout and biometric authentication to increase brand revenue, and monetize Venmo more effectively. Venmo is the company's greatest potential asset.

Venmo debit card users grew 21% year over year, and these users earned 6 times more than those limited to peer-to-peer (P2P) payments (P2P) users. Balance-funded P2P payments on Venmo grew 17%, meaning more money stayed in the Venmo network. More debit card users will increase network stickiness, which in turn will increase Venmo card transactions. The Venmo debit card will launch a powerful cycle of growth.

It's already an app that many people use regularly, and the company only needs to motivate users to keep their money within the platform. The Venmo debit card established this incentive mechanism, and now the company needs to attract more card users.

They regularly send out marketing emails and run higher cashback programs to achieve this goal, but I'd like to see Venmo offer a more compelling value proposition. The share of payments attracted to these users will greatly increase PayPal's gross profit margin next year. Venmo's user base has disposable income 22% higher than the US average, and is massive, with 60 million monthly active users and 90 million annual active users.

Monetization takes time, but the process has already begun. I think Venmo's potential was completely overlooked in PayPal's valuation. Concerns about declining sequential acquisition rates far outweigh potential opportunities.

The company has been negligent in recent years, and Alex Chriss is working to reverse the situation. It will take time, but the company is changing for the better. The stock is currently priced very low and has been hovering within the range for several months. In this context, if you want to buy on the dips at this time, it's really an unmissable entry time. You can use BiyaPay to search its code and trade this stock online in real time. You can also deposit digital currency (USDT) to BiyaPay and then withdraw fiat money to other securities to invest. Once the market realizes its solid fundamentals, stocks will pay back to patient investors.

Be patient, be patient, be patient. At the beginning of 2024, many investors who were optimistic about PayPal expected a Meta-like turnaround but were disappointed with stagnant stock prices. I think being patient is worth it.

Alex Chriss is about to enter his first year at the company and has already made a number of sound strategic decisions. The company is moving in the right direction, but the market pricing feels like a rudder is beyond repair. One of my favorite quotes about stock selection is: “The best time to buy stocks is when you don't want to. The best time to sell stocks is when you don't want to.” It's really painful and emotional to see AI stocks rise like crazy while PayPal's stock price stagnates.

However, for patient long-term investors, now is an excellent opportunity to buy a technology stock that has been undervalued due to market panic.