PayPal (NASDAQ:PYPL) stock has been massacred. Even before the bear market was being felt around the rest of the market, PYPL stock was limping into 2022. Despite a modest bounce off the fourth-quarter low, PayPal was still down 40% from its high coming into the near year.
At its recent low, shares were down a whopping62% from the all-time high. Should PayPal ever regain that high, it will equate to a ~360% rally or more than a four-fold return. Even if it takes 10 years to do so, that’s still a pretty good return for the patient investor.
If the trend is any indication though, PYPL stock seems likely to get cheaper in the future. However, this beating has made PayPal go from a growth stock to a value stock.
PayPal Still Has Growth
PayPal has had some serious growing pains lately. Increased competition for its legacy brand (PayPal) and for its more recent growth brand (Venmo) have resulted in slower growth.
When the company reported its fourth-quarter results, it missed on earnings estimates. Worse, it provided weak Q1 and full-year guidance. When it reported its Q1 results, it had in-line earnings, but again provided weak Q2 and full-year guidance. Investors are likely nervous ahead of PayPal’s Q2 results and guidance.
Despite the selloff and the recent disappointment, though PayPal still has decent growth.
Analysts expect 11.5% revenue growth this year, but 16% growth in 2023. In 2024 and 2025, estimates sit at 15.5% and 13.8%, respectively. On the earnings front, it’s a little muddier. Consensus estimates call for an earnings dip of 16% this year to $3.87 a share. However, from there analysts expect 24% growth in 2023, then 21% growth in both 2024 and 2025.
The caveat is, these are just estimates and prone to changes. But the point remains the same: PayPal still has solid growth potential.
PYPL Stock Is Now Value, Not Growth
At present value, PYPL stock trades at just 19 times this year’s earnings. Based on estimates for 2023, it trades at just 19 times earnings. On a revenue basis, shares trade at 3 times this year’s sales.
On a forward and trailing basis, PYPL stock has never traded at such a low price-to-earnings or price-to-sales basis. But that’s also what happens when a bear market comes along and a company is cutting its forecasts.
While I believe that PayPal is cheap, remember that there’s no “magic valuation floor.” Meaning there’s no special P/E or P/S ratio — or any other metric — that will suddenly indicate that the stock can no longer decline. It just doesn’t exist. Valuations don’t limit stocks in raging bull markets and they don’t support stocks in painful bear markets.
But at some point — and this goes for Advanced Micro Devices (NASDAQ:AMD), Salesforce (NYSE:CRM) and others — we have to assess the businesses and not the stocks. PayPal’s business is not perfect, but it’s not in free-fall like the stock price would suggest.
At these prices, PYPL stock is certainly worth a consideration. That’s especially as it has been free cash flowing $5 billion to $5.5 billion a year and has more than $50 billion in current assets.
How We Get a 4-Bagger From Here
All of this boils down to one simple question: How does PYPL stock rally 300%-plus from here?
Here’s how I see it. Shares are trading at 19 times earnings. In 2025, estimates call for more than $7 a share in earnings. If we apply today’s multiple (19x) to 2025, that gets us ~$135 a share — roughly a double from current levels.
The main three issues with this back-of-the-envelope calculation are:
- PayPal may not earn $7 a share.
- It may not trade at 19 times earnings.
- $135 is not a 300%-plus return.
To that I would counter: PayPal very well could earn $7 a share and by 2025, I expect to be back in a regular market or a bull market. In bull markets, multiples expand, they don’t contract. In that sense, 19 times to 25 times earnings — even if PayPal does have a slower growth rate — would be reasonable.
25 times and $7 a share gets us $175 for PYPL stock, a 150% return. But that’s only 2.5 years from now. I don’t know what the next decade brings — no one does.
Can PayPal go from $7 a share in 2025 to $15 a share in 2032? That seems reasonable. And at 20 times earnings, that gets $300 a share. Is that a perfect roadmap? No, but for a quality company and enough time, one can see how it’s more than possible.
The Bottom Line
When we navigate bulls and bear markets, we don’t know what’s irrational until after the fact. When PYPL stock was above $300 in 2021, it was clearly upside exuberance. Now back below the Covid-19 low — which in 2020 was irrational pessimism — it “feels” like we’re there again.
Only now we don’t know if the low will be around $68 or if it will take a deeper flush, like down to $50.
A decade is a long time to wait. But if the S&P 500 went from 4,000 to 12,000 in a decade, most would consider that pretty good. That’s a 200% return or a CAGR of about 11.6%. So if PayPal takes 10 years to go 300%-plus, would that really be so bad?
On the date of publication, Bret Kenwell held a long position in PYPL. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.