Mobile payment pioneer PayPal Holdings (PYPL 0.19%) has returned to earth after surging to all-time highs in the thick of the pandemic. Its stock price has slumped 48% since the start of 2022 in light of a slowdown in growth and added turbulence from high inflation and the Fed’s interest rate hikes. But given that the financial technology (fintech) juggernaut commands 50.3% of the global online payment processing industry according to one report citing metrics from Statista, now may be a good time to give the company a firm look.
The war on cash, which refers to the shift away from physical currency in favor of digital payments, is well under way, and PayPal is advantageously positioned to significantly benefit from the secular trend. According to Grand View Research, the global digital payment market is forecast to rise at a compound annual growth rate (CAGR) of 20.5% through 2030. Knowing that, investors with lengthy time horizons should be unmoved by short-term headwinds and zero in on the long-term trajectory of PayPal’s business.
On that note, let’s examine PayPal’s current situation to help investors decide if it’s a stock worth adding to their portfolios today.
Dissecting PayPal’s business
On Aug. 2, the fintech leader posted a second-quarter earnings update that mitigated many investors’ concerns about the company’s future, sparking a much-needed boost in its stock price. Its total revenue increased 9.1% year-over-year to $6.8 billion, concluding in-line with Wall Street estimates, and its adjusted earnings per share declined 19.1% to $0.93, but easily beat consensus forecasts by 6.6%. The company also added 35 million active accounts to bring its total up to 429 million, and its total payment volume (TPV) grew 9.3% to $339.8 billion.
The slowdown in growth can be attributed to a variety of different factors. Not only is eBay‘s (EBAY -1.78%) transition away from PayPal exerting pressure on the fintech giant’s top line, but high inflation and an overall softness in e-commerce compared to a year ago are causing temporary growing pains. For the full year, Wall Street analysts expect total revenue to climb 9.8% year-over-year to $27.9 billion, and its earnings per share to drop 14.8% to $3.92. In fiscal 2023, which is when year-over-year comparable metrics will normalize, the Street is calling for top- and bottom-line growth of 14.3% and 22.7%, respectively.
Over the long run, the fintech leader should be in great shape. If it can expand its top line at a CAGR of 10% from fiscal 2021 through 2025, it’ll generate roughly $41.0 billion in annual revenue. At an earnings before interest, taxes, depreciation, and amortization (EBITDA) margin of 21%, which is on par with last year, PayPal’s EBITDA figure would amount to $8.6 billion. Assuming an enterprise value-to-EBITDA multiple of 30, which is below its 5-year average of 42.4, the company’s enterprise value would be $258.3 billion, or 124% higher than its $115.5 billion right now.
Is it time to purchase shares of PayPal?
PayPal’s pullback so far in 2022 has created an excellent buying opportunity for investors, especially when taking into account the rising fintech arena. Growth may be patchy for the foreseeable future, but most of the challenges that the company is facing today are short-term in nature. Going forward, I feel confident that the fintech leader will experience a healthy bounce back and continue to reward shareholders with robust gains. At current valuation levels, PayPal appears like a no-brainer buy for patient, long-term investors.
Luke Meindl has positions in PayPal Holdings. The Motley Fool has positions in and recommends PayPal Holdings. The Motley Fool recommends eBay and recommends the following options: short October 2022 $50 calls on eBay. The Motley Fool has a disclosure policy.