Value Investor Daily #15

Is PayPal Undervalued? Pabrai Buys In. Is the Bottom in Yet?

March 15, 2024

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PayPal (PYPL) is down 80% from its peak. Is the bottom in?

Source: TradingView

Let’s investigate.

Why is the stock down so much? Some current risk factors include:

Given those challenges, how is the business doing?

Let’s look at some stats:

  • Users - 426 million (down from a peak of 435 million in Q4 2022)

  • Total payment volume (TPV) 2023 - $1.528 trillion  

  • TPV 1-yr growth - 13%

  • P/E - 16

  • 5-yr average P/E - 50

  • TTM sales growth - 2.1%

  • 5-yr sales growth - 14.8%

  • TTM EPS growth - 14%

  • 5-yr EPS growth - 24%

  • LT Debt/Equity - 45.9%

  • Return on Equity - 20.5%

What is management doing to do to remedy the situation?

The board hired a new CEO, Alex Chriss, in Q3 of 2023.

Chriss promised PayPal would shock the world with an Innovation Day event in January 2024. It didn’t. The stock has been flat since the event.

But what did they release at the event? They unveiled six innovations primarily for e-commerce merchants:

  1. New PayPal Checkout Experience

  2. Fastlane Guest Checkouts by PayPal

  3. Smart Receipts

  4. PayPal Advanced Realtime AI Offers Platform

  5. Reinvented PayPal Consumer App

  6. Enhanced Venmo Business Profiles

The market is unsure if these incremental enhancements will reactivate growth, but at least it’s a step in the right direction.

After the interview, investors believe management’s guidance for 2024 has been quite conservative.

Miller said this about margins and growth at the conference:

Yes. So, let me just start by - I've been here four months. Alex has been here a few weeks longer than that, but most of our leadership team, is new in position. And so, when you think about guidance, we feel really strongly that, we want to give you guidance that, we are convicted around that, we can meet, or exceed and we need to get back into a rhythm, of really meeting our commitments.

And that was our underpinning philosophy, in terms of how we set that. We also, candidly wanted to have some flexibility. I mentioned before we need to make investments in the business. We want to position this place, for long-term durable growth, and we think '24, is a really important year, where we've got new leaders coming in. Really pivoting their teams, and we'll probably learn more, than we knew two months ago, when we thought about guidance

But we wanted to give ourselves, both flexibility to, make different decisions, but also to invest in ways that, would really help us position to, if we saw it. But then when you start to talk about margins, margins is a really interesting one, and part of what we talked about the earnings call - on the earnings call, we gave flat guidance.

Source: SeekingAlpha

If management can return the company to growth, like management is working towards, the stock should benefit.

Let’s look at valuation.

Assumptions:

  • TTM EPS - $3.84

  • EPS growth returns to 10%

  • Discount rate - 9%

  • Add back fair value.

Source: GuruFocus

Given those estimates, the stock could be 23% undervalued right now.

Where might it end up in 10 years?

If earnings grow at 10%, EPS would be $9.95 in 10 years. And if the stock trades at a 4.29% earnings yield (the same as the 10-year treasury today), it would be at $231 by then.

If earnings grew at only 5% and interest rates doubled to 8.6%, it implies a $72.67 stock price by then.

It trades today at $63.

It looks like investors are starting to take notice.

Pat Dorsey also holds a 9.7% weighting in his concentrated portfolio.

Source: SeekingAlpha

Analysts see earnings growing to $6.50 by 2027

Source: SeekingAlpha

The average price target is $71.55.

Management plans “at least” $5 billion of buybacks this year.

If you believe in management’s ability to return the company to growth while facing increased competition, this one could be worth considering.

As always, do your own research and formulate your own opinions and assumptions.

Happy investing!

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