Paypal had been severely punished by the market having fallen by almost 80% in the past year.
While this has been caused by factors both internal and external, I do think that the risk-to-reward ratio at such levels are indeed favorable to me as such, I’ve taken steps to dollar cost average into the stock.
The reasons for their decline range from the company’s inability to sustain its rapid growth to other more fundamental shortcomings such as their declining margins.
In this article, I’ll be looking more in-depth into the reasons behind their decline along with my analysis of their current-day technicals and fundamentals.
If you prefer to hear from me, watch my quick analysis:
Paypal’s Fundamental Analysis – Bear Case
The bear case is indeed substantiated for Paypal as their fundamentals have indeed declined over the past 2 years. In a nutshell, I observed the following in my research,
- Revenue growth is still present however the pace of increase is slowing.
- Earnings have started to diverge from revenue. (Huge Red Flag)
- Reported negative earnings in 2Q2022
- Total Payment Volume is stagnating.
Why is Paypal’s fundamentals declining?
In my research, I’ve managed to narrow down their declining fundamentals to just 2 reasons,
1) Decrease in Discretionary Spending
The same narrative is seen across all industries where consumer spending has decreased all for the same reasons that we know it to be; Inflation, Recessionary Fears & Job Losses.
In the case of Paypal they took the brunt of this more than other companies as not only did consumers spend less, consumers also started spending more offline.
“As the lockdowns subsided, people went back to in-person spending,” explained Gabriele. “Some people, believe it or not, even went back to cash.”
– CNBC
2) Increased Competition in the Payment Space
In recent times, we’ve seen the emergence of companies pivoting away from “subcontracting” their payment gateways to building payment gateways of their own.
This is indeed prevalent when we look at companies such as Apple and Google who have both developed their own payment gateways. In addition to this, we also see Paypal lose market share to Stripe in reference to Amazon’s long-standing partnership with Stripe.
Apart from fundamental metrics such as earnings and revenue, investors also consider Paypal’s Total Payment Volume or TPV as a crucial metric to gauge its growth.
Looking at the chart above, where although TPV is indeed increasing over time, its rate of increase (specifically year-on-year change) has actually been falling. This is indeed concerning for investors as it could be seen as the tipping point for them as a “growth stock”.
Paypal’s Fundamental Analysis – Bull Case
While there is indeed plenty to be bearish about, I do think that given this 80% sell-off that we can indeed start to claim that Paypal is “cheap” based on its valuations when compared to other companies.
In terms of forward P/E, we can conclude that Paypal is indeed cheap, given that the industry’s forward P/E is about 40 whereas Paypal is currently trading at a forward P/E of 12
In addition to this, if we look at Paypal’s trailing 12-month revenue in comparison to other players in the payment space, we can see that they are still a market leader in the industry with only Visa and Mastercard coming close to their revenues.
Historically, we are also seeing their PE ratio hit below 2019 levels which suggests that the stock may be undervalued at this point in time.
Lastly, I find their Free Cash Flow to be healthy, which to me is always a bullish indication. FCF gives a better insight into the actual performance of companies compared to other metrics such as profits. A healthy FCF indicates that a company is well-managed and operates efficiently.
Technical Analysis of Paypal
Paypal broke below key support recently
The Price Action of Paypal is indeed showing mixed signals as they recently broke their key support level of $70 (Indicated in Red). This suggests that there could be further downside to come given that the next key support level would be at about $45-50 (Indicated in Green).
In my opinion, I believe that accumulating this stock at $60 puts the risks in my favor given that I do not think the stock will reach those $45-$50 levels hence the only way from here is up (hopefully).
Paypal hasn’t broken above moving averages yet
Unfortunately, the moving averages are indeed looking very bearish as not only do we have the absence of a golden cross (which many other tech stocks have already seen of late), we have the 200 Day Moving average (Blue Line) acting as somewhat of a strong resistance level for the stock given that the price action has failed to break above this point twice in recent time (Orange Circles).
If any hope at all, we are seeing the two moving averages tighten which is usually an indication of more bullish action to come. Hence any accumulation at such levels may not necessarily be seen as catching a falling knife.
Why I bought Paypal despite all the above
While the bear case does indeed carry some weight, I do think that a 80% sell-off for a company that’s still fundamentally strong is indeed a bit of an overreaction.
Overall, Paypal has been one of the most reliable payment services for many years, and its position as a leader in the financial technology space is still undisputed. While this sell-off could be interpreted as a sign of waning investor faith in Paypal, I believe that these shortfalls are simply part of PayPal’s transition to a larger and more complex system.
In my opinion, we might just be witnessing Paypal’s transition from a growth to value stock.
