PayPal Is Buying Its Own Stock, Should You Buy It Too? | PayPal Analysis

I’ve made a video in the end of 2021 about my top 5 stocks to outperform in 2022. That video didn’t age well because PayPal has since then dropped around 36%. Of course, 2022 has only just begun and a lot will be happening till the end of the year. So let’s take a deeper look into PayPal.

Last 6 months fintech companies like PayPal, Block (former Square), Adyen and many more have been selling off. Fintech refers to the integration of technology into offerings by financial services companies in order to improve their use and delivery to consumers.

Paypal helps merchants integrate with PayPal to manage their business and helps consumers use PayPal for financial services and shopping tools. You might not know this but PayPal owns Venmo, Xoom, Paidy, Honey and many more payment solutions. PayPal is slowly building out a moat in the financial space.

On the 1st of February, PayPal reported earnings. The day after earnings the stock dropped at least 24% and has been dropping more since then. This share price drop has been PayPal’s fastest ever, wiping out 50 billion dollars. That is a lot of money. PayPal did beat on revenue but fell a little short on earnings per share. The most concerning thing for investors is the revenue growth outlook. PayPal expects to grow between 15% and 17%, below the 18% analysts expected.

Higher inflation on consumer spending and the ongoing supply chain issues seems to be the problem. To be honest I am not concerned about these short time issues. In the long run these issues will be solved and faster growth might come back sooner or later.

What we got to ask ourselves is: if the big drop after earnings is justified or can it be a buying opportunity?

To find this out we have to dig a little deeper in the earnings report. First of all I want to show you what innovation PayPal brought to 2021. PayPal rolled out a new digital wallet, expanded their pay later footprint, you can checkout with crypto by using PayPal and on Venmo you can now trade crypto.

PayPal is still the most accepted digital wallet with 76% acceptance rate over the largest online retailers. This is a big deal and will keep customers from leaving PayPal.

PayPal is blaming the slow in growth mainly on eBay. eBay sellers can no longer use PayPal and this is effecting the revenue of PayPal. But what I find interesting is that other segments of PayPal are still growing pretty rapidly. eBay is now only 3% of the revenue of PayPal and will have less effect on the revenue growth in the coming years. A positive catalyst in my opinion. Since the eBay revenue decrease was expected, it’s a bit funny that people are selling shares right now and not earlier.

Next to this, people seem to ignore that PayPal recently has made a deal with Amazon. In the third quarter of 2021 PayPal announced they are teaming up with Amazon to enable customers in the U.S. to pay with Venmo at Amazon checkout. This is amazing news and can be a new revenue growth driver in the following years.

Venmo already grew payment volume 29% in the last quarter, and 44% in 2021. The deal that is coming in 2022 with Amazon will increase growth even more on this platform. Keep an eye on Venmo.

Last quarter 10 million new active accounts got added to PayPal platforms. This is lower than last quarters, mainly due to illegitimate accounts. Personally I expect the deal with Amazon and the crypto trading to influence a stream of new accounts added to Venmo this year and into years to come.

The growth in transactions per active account is compensating the lack in new account growth. The number of transactions of Q4 is up 21%, despite a 54% decline in eBay transactions. Overall very impressive and this again highlights PayPal underlying growth is out shadowed by eBay.

So you know what PayPal decided to do with the drop in share price? They bought back 8 million shares in Q4 at an average price of 187 dollars per share. Since 2018, PayPal has not bought back so many shares in one year time.

When I was reading the annual report I also found out that PayPal has another 5.1 billion dollars available to do future buybacks. Don’t be surprised if PayPal has been buying back more than 2 billion dollars in shares for next the quarter, remember my words.

The CEO has also decided that this is a buying opportunity. One day after the 24% drop the CEO bought almost 8000 shares worth around 1 million dollars. Next to the CEO, two directors and the EVP also saw a valuable buying opportunity and bought together worth over 2 million dollars of shares. If this is not a green light, then I don’t know anymore.

The balance sheet of PayPal does not look spectacular. But it is alright. They have enough current assets to pay off the current liabilities. The company does not have a lot of long term debt either, and they paid down 1 billion dollars since last year.

Last thing I want to discuss is the valuation of PayPal. This graph indicates the p/e ratio since the company went public. The p/e ratio of PayPal has not been lower since 2016. Very interesting to see the drop in p/e ratio over 2021.

The current p/e ratio is 33. This is a little bit high. Given the fact that PayPal is a high quality company with positive earnings and has growth for the coming years, you might be willing to pay a premium price. The forward p/e on Seeking Alpha indicates a higher the p/e for next quarter. Q4 (last quarter) is always the busiest quarter for PayPal so the forward p/e being higher does not say a lot.

The real forward p/e for 2022 is 24.4. And the forward p/e for 2025 is only 12.4. These numbers already look a lot more attractive. So if you believe in the growth numbers of PayPal, it can be a buy right now.

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In my opinion the price to cash flow also looks reasonable at 21 with a forward price to cash flow of only 17.

I think the signal of the CEO buying more shares is strong that nothing is wrong with the company. The deal with Amazon will be a great growth catalyst, that is not yet priced in.

Not a fan of reading check out my video now!

If you liked my analysis definitly check out my YouTube channel for more: https://www.youtube.com/channel/UC74ascgDjOZzQXXCZGisQtw

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Good job @Frisoke ! Nice to see how you make these articles in the bux community. Many people ( like myself) love to see how you make those articles. They are educational and easy to read!

GOING STRONG :muscle::muscle::muscle:

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This a such a good read, thank you so much for the analysis again @Frisoke! :star_struck:

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