PYPL Stock Study (4-29-24)

I recently did a stock study on PayPal Holdings Inc. (PYPL) with a closing price of $65.96. The previous study is here.

M* 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 425 million active
     > users. In 2023, approximately 25.0 billion transactions were
     > completed on its platform. From 2002 to July 2015, PayPal was
     > a wholly-owned subsidiary of eBay.

Over the past nine years, this large-size company has grown sales and EPS at annualized rates of 16.4% and 17.4% [24.6% including $0.31/share in ’14], respectively. Lines are mostly up, straight, and parallel except for EPS dips in ’21 and ’22.

Over the past decade, PTPM trails peer and industry averages while ranging mostly (excluding 23.6% in ’20 and 12.2% in ’22) from 15.0% in ’16 to 18.2% in ’23 with a last-5-year mean of 17.4%. ROE trails peer and industry averages despite increasing from 9.3% in ’15 to 20.9% in ’23 with a last-5-year mean of 17.7%. Debt-to-Capital is less than peer and industry averages despite increasing from 15.2% in ’14 to 31.5% in ’23 with a last-5-year mean of 29.7%.

Quick Ratio is 1.2 and Interest Coverage is 16.6. M* gives a “Standard” rating for Capital Allocation while Value Line gives a B++ (down from A about eight months ago) grade for Financial Strength.

With regard to sales:

• YF projects YOY 6.9% and 7.8% for ’24 and ’25, respectively (based on 42 analysts).
• Zacks projects YOY 7.3% and 7.8% for ’24 and ’25, respectively (10 analysts).
• Value Line projects 4.2% annualized growth from ’23-’28.
• CFRA projects 7.2% YOY and 7.6% per year for ’24 and ’23-’25.
• M* provides a 2-year CAGR of 7.7% and projects 8.0% annualized for the next 10 years in its analyst note.

I am forecasting below both long-term estimates at 4.0% per year.

With regard to EPS:

• MarketWatch projects annualized growth of 7.0% and 7.5% for ’23-’25 and ’23-’26, respectively (based on 48 analysts).
• Nasdaq.com projects 12.2% YOY and 11.0% per year for ’25 and ’24-’26 [13, 12, and 4 analyst(s) for ’24, ’25 and ’26].
• Seeking Alpha projects 4-year annualized growth of 10.1%.
• YF projects YOY 0.4% contraction and 10.6% growth for ’24 and ’25, respectively (42), along with 5-year annualized growth of 12.4%.
• Zacks projects YOY 0.2% and 10.3% growth for ’24 and ’25 (12) along with 5-year annualized growth of 13.4%.
• Value Line projects 9.5% annualized growth from ’23-’28.
• CFRA projects 2.0% YOY and 5.7% per year for ’24 and ’23-’25, respectively, along with a 3-year CAGR of 11.0%.
• M* projects long-term annualized growth of 19.4%.

My 9.0% annualized forecast is below the long-term-estimate range (mean of five: 13.0%). I will use ’23 EPS of $3.84/share as the initial value. Compared to ’21, $3.84/share is normalized (4.4% growth rate) despite being 83.7% greater YOY.

My Forecast High P/E is 23.0. Since 2015, high P/E increases from 42.5 in ’15 to 93.8 in ’22 before falling to 23.1 in ’23 for a last-5-year mean of 66.5 and a last-5-year-mean average P/E of 49.1. I am forecasting below the entire range.

My Forecast Low P/E is 13.0. Since 2015, low P/E ranges from 13.1 in ’23 to 50.9 in ’21 with a last-5-year mean of 31.7. I am forecasting below the range.

My Low Stock Price Forecast (LSPF) of $49.90 is default based on initial value of $3.84/share. This is 24.3% less than the previous close and near the 52-week low of $50.30.

These inputs land PYPL in the BUY zone with a U/D ratio of 4.4. Total Annualized Return (TAR) is 15.6%.

PAR (using Forecast Average—not High—P/E) is 10.0%, which is less than I seek in a large-size company. If a healthy margin of safety (MOS) anchors the study, then I can proceed based on TAR instead.

To assess MOS, I start by comparing my inputs with those of Member Sentiment (MS). Based on 222 studies (my study and 90 outliers excluded) over the past 90 days, averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, and Forecast Low P/E are 7.5%, 10.0%, 25.0, and 15.0, respectively. I am lower across the board. Value Line’s projected average annual P/E of 25.0 is higher than MS (20.0) and higher than mine (18.0).

MS high / low EPS are $6.18 / $3.75 versus my $5.91 / $3.84 (per share). My high EPS is lower due to a lower growth rate. Value Line’s high EPS is in the middle at $6.05.

MS LSPF of $49.90 implies a Forecast Low P/E of 13.3: lower than the above-stated 15.0. MS LSPF is 11.3% less than the default $3.75/share * 15.0 = $56.25 resulting in more conservative zoning. MS LSPF is equal to mine.

TAR meets my 15% criterion despite being lower than MS 21.4%. MOS is robust in the current study.

With regard to valuation, PEG is 1.0 and 1.8 per Zacks and my projected P/E, respectively: the latter slightly overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] is extremely cheap at 0.35.

The 0.35 reflects severe P/E compression between ’21-’22 and 2023. Compression is mainly due to stock price decrease with ’23 EPS and ’21 EPS roughly equal. Coincidently, analyst estimates are much lower today than my first study nine months ago. Going forward, I believe whether P/E remains compressed or expands consequent to rebounding growth [estimates] will strongly influence where the stock price heads next.

Either way, PYPL is a BUY under $71/share.