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The Mood Is Improving

Global payments platform PayPal (PYPL: $118) and its shareholders have endured a rough couple of months. Triggered by poor fourth quarter results in early February and persistent worries about too much competition in Electronic Payments dooming the stock in a rising rate environment, shares fell to a 52-week low a few weeks ago and are now "only" up 27% from that deeply depressed level.

While several analysts have downgraded the stock for nebulous reasons, Goldman Sachs has initiated coverage with a “Buy” rating and a $144 price target, representing an upside of 21% from here. The analyst expects PayPal to return to earnings growth in excess of 20% after 2022, fueled by substantial tailwinds in the form of eCommerce growth, digitalization and more. That's historically all this company has ever needed to keep the stock climbing at a healthy rate, year after year.

PayPal has significantly upped its game when it comes to eCommerce, especially with its acquisition of HappyReturns, a solution that allows merchants who use PayPal Checkout to seamlessly handle returns. The company has further partnered with Ulta Beauty and a number of other firms to expand its return bar locations to over 5,000, offering a critical network for online retailers, especially at a time when average return rates are in excess of 20%.

On a fundamental level, PayPal remains as sturdy as ever. What it went through in recent months is an amalgamation of various factors, mainly the post-COVID overhang, that many of its peers continue to deal with, followed by the loss of eBay payment volumes (anticipated for years) and the lack of any visible growth catalysts in the medium term as the company enters into a “transition year.”

But this is a giant company, at $140 billion of market cap. The all time high is $310 less than a year ago. It WILL get back there – it’s just a matter of time. Last four years of revenues: $15 billion in 2018, followed by $18 billion, $21 billion and then $25 billion last year. Last quarter revenues: $7 billion. And the company is quite profitable too.

The market’s narrow-minded view has resulted in a strong opportunity for value investors to pick up this beaten-down Fintech giant and ride the indomitable growth of digital payments. Trading at just under 6 times sales, the stock is oversold and undervalued. We continue to maintain our Price Target at $305, and reiterate our pledge to never sell this company.