Why You Should Buy the Dip in PayPal (PYPL)

In the past week, the stock of Paypal Holding Inc. (PYPL) has experienced a surge in volatility due to market rumors of a potential bid on social media group, Pinterest (PINS). The supposed $45 billion acquisition, that PYPL has since announced it was not pursuing “at this time,” sparked a sell-off in shares, which have now dropped to a 5-month low.

I believe that this dip in PYPL is an opportunity for long-term investors looking to get exposure to one of the leading digital and mobile payment platforms.  Today, I will discuss why I believe this and identify the main catalysts that should push the stock to new highs. 

In 2021, PYPL’s financials are expected to record a marginal bottom line slowdown compared to previous years. While the company maintains a robust top-line growth, up 20.2% year-on-year to $25.78b, net income is estimated to decline marginally, down 0.7% to $4.17b. Despite that, PYPL’s market share is expected to continue to expand going forward and its financial metrics should follow. Analysts are expecting its top line to continue to advance rapidly in the next three years by an average of 20% and net profit should accelerate in 2022 and 2023, up respectively 21.9% to $5.07b and up 29.9% to $6.59b in 2023.

PYPL’s capital structure is healthy. While PYPL’s cash position is expected to decline rapidly in 2021, down 31.5% year-on-year to $8.96b, analysts are expecting a steep appreciation in the next two years, up 52.4% to $13.66b in 2022 and up 44.1% to $19.69b in 2023, enabling the company to sustain its growth prospects and to continue to develop its financial services offerings. Besides, the payment giant has raised CAPEX consistently over the years, and going forward it is estimated to continue to do so, up 27.8% to $1.28b in 2022 and up 18.9% to $1.52b in 2023.

With these best in class financials, the company trades at a 2022e EV/EBITDA of 29.3x and a 2022e P/E ratio of 57.6x, compared to respectively 26.1x and 33.9x for Mastercard Inc. (MA). Despite these high valuation metrics compared to industry peers, PYPL is one of the leading digital payment platforms that should continue to dominate its market. 

PYPL recently acquired Paidy for $2.7bn, a Japanese buy now and pay later service, enabling it to move into the popular financial service that allows consumers to spread costs over time, usually without paying interest. Moreover, the digital payment specialist is currently rolling out in the U.S. its consumer wallet super app, which will provide savings, e-commerce, cryptocurrency, and messaging capabilities, similar to China’s WeChat app. With these strategic moves, PYPL’s presence in digital payments should strengthen, propelling its net revenues and therefore sustaining its share price, which has been disliked by investors this year. 

Take away

Shares of PYPL have slid more than 20% over the past three months.  I believe this provides an attractive entry point for long-term investors. Wall Street analysts are forecasting PYPL’s top line to continue to advance rapidly in the next few years and net profit should accelerate in 2022 and 2023.  The company provides best-in-class financials and compelling growth catalysts that should push its shares higher.