PYPL Stock Study (8-1-23)

I recently did a stock study on PayPal Holdings Inc. (PYPL) with a closing price of $75.82.

Value Line writes:

     > PayPal Holdings, Inc. operates a technology platform that
     > enables digital and mobile payments by consumers and merchants
     > throughout the world. It offers a wide range of payment
     > solutions under the brands: PayPal, PayPal Credit, Venmo, Xoom,
     > Paydiant, and Braintree. Has more than 435 million active
     > users. In 2022, approximately 22.3 billion transactions were
     > completed on its platform. From 2002 to July 2015, PayPal was
     > a wholly-owned subsidiary of eBay.

Over the past decade, this large-size company has grown sales and EPS at annualized rates of 17.5% and 22.8%, respectively. Lines are mostly up, straight, and parallel except for EPS dips in ’14, ’21, and ’22. PTPM is below peer and industry averages while going from 16.1% in ’13 to 12.2% in ’22 with a last-5-year mean of 16.9%.

Since 2015, ROE trails peer and industry averages by going from 9.3% in ’15 to 11.7% in ’22 with a last-5-year mean of 16.2%. Debt-to-Capital is also less by going from 17.9% in ’13 to 33.9% in ’22 with a last-5-year mean of 25.7%.

M* gives a “Standard” rating for Capital Allocation while Value Line gives an A grade for Financial Strength. Interest Coverage is 12.5 and Quick Ratio is 1.24.

With regard to sales growth:

• CNN Business projects 7.6% YOY and 8.4% per year for ’23 and ’22-’24 (based on 39 analysts).
• YF projects YOY 7.5% and 9.1% for ’23 and ’24, respectively (43 analysts).
• Zacks projects YOY 7.3% and 8.8% for ’23 and ’24, respectively (13).
• Value Line projects 5.2% annualized growth from ’22-’27.
• CFRA projects 7.5% YOY and 8.2% per year for ’23 and ’22-’24.
• M* provides a 2-year CAGR of 8.5% and 11.0% annualized growth for the next 10 years in its analyst note.

I am forecasting below both long-term estimates at 5.0%.

With regard to EPS growth:

• CNN Business reports ACE of 19.9% YOY and 17.2% per year for ’23 and ’22-’24, respectively (based on 39 analysts), along with 5-year annualized growth of 15.7%.
• MarketWatch projects annualized growth of 17.5% and 15.3% for ’22-’24 and ’22-’25, respectively (47 analysts).
• Nasdaq.com projects 17.2% YOY and 11.5%/year for ’23-’25 and ’23-’26 [15, 14, and 1 analyst(s) for ’23, ’25 and ’26].
• Seeking Alpha projects 4-year annualized growth of 17.3%.
• YF projects YOY 19.9% and 14.3% for ’23 and ’24, respectively (42), along with 5-year annualized growth of 17.3%.
• Zacks projects YOY 19.9% and 14.8% for ’23 and ’24, respectively (15), along with 5-year annualized growth of 17.6%.
• Value Line projects 23.3% growth per year from ’22-’27.
• CFRA projects 20.3% YOY and 17.3% per year for ’23 and ’22-’24 along with a 3-year CAGR of 15.0%.
• M* projects long-term growth of 18.5%.

My 12.0% forecast is at the bottom of the long-term-estimate range (mean of six: 18.3%). I will use ’22 EPS of $2.09/share as the initial value rather than 2023 Q1 EPS of $2.36 (annualized).

My Forecast High P/E is 38.0. Since 2015, high P/E increases from 42.5 in ’15 to 93.8 in ’22 with a last-5-year mean of 72.9. I am forecasting below the entire range. The last-5-year-mean average P/E is 55.1.

My Forecast Low P/E is 26.0. Since 2015, low P/E ranges from 23.2 in ’20 to 50.9 in ’21 with a last-5-year mean of 37.3. I am forecasting near the bottom of the range (only ’20 is lower).

My Low Stock Price Forecast (LSPF) of $54.30 is the default based on initial value of $2.09/share. This is 28.4% less than the previous close and 8.0% less than the 52-week low.

These inputs land PYPL in the HOLD zone [threshold] with a U/D ratio of 3.0. Total Annualized Return (TAR) is 13.0%.

PAR (using Forecast Average—not High—P/E) is 9.2%, which is less than I seek in a large-size company. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 312 studies done in the past 90 days (my study and 104 outliers excluded), averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, and Forecast Low P/E are 8.5%, 14.6%, 43.7, and 29.2, respectively. I am lower across the board. Value Line projects a future average annual P/E of 35.0, which is lower than MS (36.5) and higher than mine (32.0).

MS high / low EPS are $4.54 / $2.30 vs. my $3.68 / $2.09 (per share). My high EPS is lower due to a lower growth rate.

MS LSPF of $50.60 implies a Forecast Low P/E of 25.7 vs. the above-stated 29.2. MS LSPF is 12.2% less than the default $2.30/share * 29.2 = $67.16, which results in more conservative zoning. MS LSPF remains 8.7% greater than mine.

MOS backing the current study seems robust. My TAR [at least 15.0% preferred] is much less than MS 24.1%.

I track a few different valuation metrics. PEG per Zacks is undervalued at 0.87 but overvalued at 2.4 per my forward P/E. Relative Value [(current P/E) / 5-year-mean average P/E] per M* is undervalued at 0.73. Kim Butcher’s “quick and dirty DCF” prices the stock at 28.0 * [$7.40 – ($0.00 + $1.35)] = $169.40 thereby suggesting the stock to be undervalued by 55.0%.

I would look to BUY the stock under $72/share in hopes of qualifying TAR.