PayPal (PYPL) Stock May Trade At A Discount On Earnings But Carry Growth Risk

PayPal Holdings has had a difficult run over the past five years, yet its current valuation screens cheap on several broad checks. After a sharp multi year decline in the share price, investors are weighing whether today’s lower level offers genuine value or simply reflects reduced expectations.

• Over the past five years, PayPal’s share price has fallen about 80%, which puts the stock firmly in turnaround territory for many investors.
• The collapse of a reported US$50b takeover interest from Advent and Stripe removes a potential support for the share price, while PayPal’s ability to keep converting its payments platform into resilient free cash flow may support the valuation over time.
• On a broad set of valuation checks, PayPal screens as cheap, with a value score of 5, which means the stock looks undervalued against several fundamental yardsticks.

The issue now is whether PayPal’s current price properly reflects the risks in its business or leaves room for a rerating if execution stabilises.

Spot 53 high quality undervalued stocks hand picked for investors comparing PayPal’s deep value story with other stocks that also screen cheaply on fundamentals.

Is PayPal Holdings Still Cheap on Earnings?

The P/E multiple is a reasonable way to think about PayPal Holdings because earnings remain a key focus for how this payments stock is priced. PayPal currently trades on a P/E of about 9.9x, which is well below the diversified financial industry average of roughly 17.0x and also far under a peer group average near 45.3x.

The fair P/E ratio from the model, which blends PayPal’s growth profile, margins, size and risk into a single benchmark, is about 15.7x. That sits between the industry average and the richer peer group and is still some distance above the current 9.9x level. Despite the reported collapse of the US$50b takeover interest from Advent and Stripe weighing on sentiment, the stock’s P/E still points to a sizeable discount compared with what this framework suggests might be reasonable for PayPal.

On this earnings multiple, PayPal stock appears undervalued compared with both sector norms and its tailored fair P/E benchmark.

See what the numbers say about this price — find out in our valuation breakdown.

The PayPal Holdings Narrative: What Would Justify Today's Price?

Simply Wall St Narratives for PayPal Holdings' stock pick up where this valuation puzzle leaves off. They spell out what would need to happen to PayPal Holdings' revenue growth, margins and earnings for the stock to be worth materially more or less than today’s price, and they sit on Simply Wall St's Community page. Rather than rely on a single multiple or model, each one lays out its assumptions so you can track how they compare with future results.

Community views on PayPal Holdings are sharply split, with one camp leaning into the cash generation story and another focused on long term disruption risk.

Bull case: 31% undervalued

"The company will continue to pay 'rent' to partner banks, but in exchange, it avoids the regulatory stranglehold that caps the return on equity (ROE) of traditional banks..."

Read the full Bull Case to see why PayPal Holdings could be undervalued

Bear case: 78% overvalued

"The rise of direct account-to-account payments and blockchain technologies is enabling merchants and consumers to bypass traditional payment processors altogether..."

Read the full Bear Case to see why PayPal Holdings could be overvalued

Do you think there's more to the story for PayPal Holdings? Head over to our Community to see what others are saying!

The Bottom Line

PayPal Holdings screens as undervalued on earnings multiples, yet the stock has also carried a lot of execution and disruption risk over the past five years. The broad valuation checks point to a discount that only pays off for investors if PayPal can keep translating its payments scale into resilient earnings and free cash flow. The crux is whether the current multiple reflects lasting pressure on growth and margins, or if it leaves room for a re rating if the company proves its model is more durable than the bear case suggests.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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