Is PayPal a Buy Sell Or Hold?

In the landscape of financial markets, PayPal's performance and forward trajectory are garnering notable attention. The renowned digital payments company's first-quarter earnings have pushed the bullish sentiment close to a tipping point. Notably, the prospects for the stock, despite their current challenge, point towards a bright future, provided the management adeptly navigates the evolving marketplace.

PayPal's first-quarter results elicited a shift in investor sentiment, edging closer towards capitulation - a pivotal moment that can often herald a subsequent surge. Long-term bullish investors see this moment as an opportunity to steadily accumulate a larger position. However, for this to manifest into substantial gains, the company's management must actualize the projected growth and overcome existing hurdles.

While the expectations are high, with the company increasing its full-year earnings growth guidance from approximately 18% to around 20%, potential hurdles could derail this trajectory. A consumer-oriented recession in the second half of the year, or continuing competitive pressures lowering rates, could turn these lofty expectations into significant challenges. Thus, while the overall sentiment is edging closer to a turning point, the onus is on PayPal's management to ensure this potential materializes into gains for investors.

The company's long-term bullish case rests on several pillars. For one, the core branded processing revenues are anticipated to continue their steady growth. The network effects ingrained in PayPal's business model - boasting around 400 million customers and roughly 35 million merchants - makes it difficult for emerging competitors to entice users away from the established platform.

Further, PayPal's unbranded processing business, while currently facing lower margins due to the broader revenue mix shifting in that direction, holds promise. The bullish case assumes that management will find ways to stabilize margins while facilitating growth on an international scale.

While PayPal's valuation may not yet have hit a capitulatory point, it's undeniably growing more attractive. With the stock trading at roughly 13x consensus 2023 earnings and a ~6.7% free cash flow yield, long-term investors confident in the business's health may find this a tempting entry point. Moreover, if management can make steady, long-term progress on the unbranded front while growing the top-line 5-10% CAGR, 13x would be a compelling entry valuation.

Despite the recent challenges, PayPal's future growth trajectory remains exciting. The potential acquisition of Pinterest last year, although ultimately unsuccessful, pointed to the company's strategic focus on expanding its user base and integrating social media to create stronger network effects. As the new management sets its sights on strategic growth options, the company's solid financial standing will prove to be an asset.

The company's strong balance sheet, highlighted by Fitch Ratings' 'A' rating for PayPal's recently issued Yen bonds, is indicative of its history of prudent financial management. The company's liquidity and solvency metrics are robust, and its significant cash balance of $10.6 billion suggests that they have room to maneuver to explore strategic initiatives.

Amidst these developments, a significant move came in the form of a substantial purchase agreement with private equity firm KKR. KKR has agreed to acquire up to 40 billion euros ($43.71 billion) of PayPal's buy now, pay later (BNPL) loans in Europe. This deal, which is anticipated to generate about $1.8 billion in gross proceeds, is expected to conclude in the second half of the year.

After this transaction, PayPal plans to allocate approximately $1 billion to additional share repurchases in 2023, contributing to an updated outlook of around $5 billion in total share repurchases for the year. Given that PayPal processed more than $20 billion of BNPL payment volume globally last year, marking a nearly 160% increase from 2021, this strategy seems fitting.

Looking at the broader market landscape, consensus estimates for PayPal's forward P/E in 2023 and 2024 stand at 12.5x and 11.0x respectively. These figures are substantially below the S&P 500 multiple of roughly 19x, making PayPal's valuation increasingly attractive. Moreover, compared to industry peers, the enterprise value to EBITDA metric is appealingly priced, implying a potential share price of approximately $105.4 on a conservative basis.

Technically, the stock could be forming a base at the $60-$65 mark. However, overcoming significant overhead resistance between the $70-$80 range, where the 50, 100, and 200-day moving averages reside, could open the way for a test of the $100 mark in the next 12 months. This scenario hinges on a blend of robust fundamentals, challenging technicals, and a promising growth story.

Is PayPal a Buy Sell Or Hold?
The sentiment leans towards a 'buy' or 'hold' status, assuming a positive outlook on the management's ability to capitalize on strategic growth opportunities

1. Reasonable Valuation: PayPal's stock is currently trading at around 13x consensus '23 earnings, a valuation that might be considered attractive for long-term investors, particularly given the company's potential growth prospects.

2. Solid Financial Health: The company has a healthy balance sheet, as evidenced by a large cash balance of $10.6 billion, and Fitch Ratings' 'A' rating for PayPal's most recently issued Yen bonds. This financial stability provides the company with the ability to pursue strategic growth initiatives.

3. Growth in E-commerce: As a significant player in the online payment industry, PayPal stands to benefit from the secular growth trend in e-commerce. With more businesses moving online, demand for digital payment solutions is expected to increase, providing potential growth opportunities for PayPal.

4. Potential for Strategic Growth Options: Despite past missteps (like the botched acquisition of Pinterest), the company still has potential opportunities for strategic growth, especially if new management explores acquisitions in the social media space. This could provide access to a larger user base and create network effects by integrating social media.

5. Optionality in the Business: PayPal possesses under-monetized assets, particularly Venmo, which could offer significant growth opportunities if properly leveraged. If new management can provide a compelling growth narrative around these assets, the stock could potentially undergo a re-rating.

While the company's strategy and management approach require further clarification, the current scenario provides an opportunity for investors to generate substantial income return by selling upside calls. The potential to extract a 10-20% income return in this way could offer significant rewards while the company's future direction becomes clearer. Overall, while PayPal faces both challenges and opportunities, its financial robustness and growth potential make it an enticing prospect for discerning investors.