He S&P 500 Bitcoin stock price has hit one new all-time high after another in 2024, but not all stocks have participated in the current bull market. Some stocks are still suffering losses, well below the highs reached in late 2021 and early 2022.
Some of the companies behind those stocks benefited from the behavioral changes brought on by the COVID-19 pandemic, but as things start to look like they were before the pandemic, they no longer look as attractive. Others, however, appear oversold and their current valuations do not reflect their true potential.
An example of the latter is Paypal (NASDAQ: PYPL). PayPal’s stock price rose as COVID-19 drove more online and contactless sales. But a couple of bad quarters and a CEO change led to a stock sell-off. The stock is currently trading around 81% below the all-time high it reached in mid-2021. Here’s why it may be a great opportunity to buy some shares.
It is already showing signs of change
One of the biggest things that affected PayPal over the past year was the decline in total active accounts. Active accounts peaked in the fourth quarter of 2022 and experienced four consecutive sequential declines during 2023.
But active accounts increased in the first quarter, rising 2 million to reach 427 million in total. While there is still a long way to go to get back to where it was at the end of 2022, the progress of the recovery is encouraging.
The biggest driver of the decline in active accounts was the churn of inactive accounts in emerging markets across Latin America and Asia Pacific regions. It is now growing by adding users who are spending more and more frequently. Total payment volume increased 14% year-over-year despite having fewer users than this time last year. Transactions per active account over the past year hit an all-time high of 60.
The virtuous circle that drives strong engagement growth
PayPal’s growing user engagement indicates the advantage of its network. On one side of the network are consumers and on the other side are merchants. The huge consumer base using PayPal attracts more merchants to accept the digital wallet and the growing number of merchants using PayPal attracts more consumers to the platform. An increasing number of merchants also gives existing users more opportunities to use PayPal.
There are good reasons for merchants to choose PayPal as well. Not only does it add another payment option for around 400 million online shoppers, it also makes them more likely to complete a transaction. The company reports a 33% increase in payment conversions when the buyer uses PayPal versus another payment method.
While PayPal has competition, none of its competitors have as large a user base as PayPal, making it virtually indispensable for online merchants.
That said, fierce competition can and has affected PayPal’s ability to charge higher fees to merchants. It also pressured the company to allow consumers more choice in their default payments, rather than forcing them to pay using methods more lucrative to the company (such as cash balances).
Still, it’s hard to deny PayPal’s position as the leading digital wallet, putting it in prime position for the continued secular growth of e-commerce.
The stock is a real bargain.
The stock currently trades at a forward price-to-earnings ratio of less than 14x. That’s an incredibly low value, even if competition is expected to hurt its revenue and margin growth.
Management’s updated full-year 2024 guidance calls for mid- to high-single-digit earnings per share (EPS) growth. PayPal should be able to drive double-digit revenue growth as it returns to year-over-year active account growth this year. While brandless payment has impacted its gross margin, it is cutting costs in other areas, which should result in stable or increasing operating margins. That could mean PayPal beats its current full-year outlook.
What’s more, PayPal is aggressively buying back shares at this price. It forecasts $5 billion in free cash flow and management plans to buy back even more than $5 billion in stock this year. This provides an additional boost to earnings per share.
Wall Street analysts currently expect PayPal to grow its earnings per share at a compound annual rate of nearly 16% over the next five years as a result of the above factors. Therefore, with shares trading below 14 times earnings, they represent an incredible bargain for investors.
Should you invest $1,000 in PayPal right now?
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Adam Levy has no positions in any of the stocks mentioned. The Motley Fool has positions in PayPal and recommends them. The Motley Fool recommends the following options: Buy June 2024 options at $67.50 on PayPal. The Motley Fool has a disclosure policy.
1 Incredible Growth Stock That’s Down 81% That You’ll Regret Not Buying When It Goes Down was originally published by The Motley Fool