PayPal Stock Looks Attractive after the Recent Dip

PayPal (PYPL) is a fintech company that enables digital and mobile payments on behalf of people and businesses worldwide.

PYPL stock touched a high of $310 in July 2021. However, it has seen weakness and currently trades lower by 33% at $211. I am bullish on PYPL stock at current levels. (See Analysts’ Top Stocks on TipRanks)

It’s unrealistic to expect stocks to go parabolic, even for industries that have long-term secular tailwinds. There can be near-term dips that serve as a buying opportunity.

The digital payments industry is in a phase of sustained adoption and growth. Just in 2020, consumers spent $900 billion more at online retailers versus the previous two-year period. The COVID-19 pandemic accelerated this digital payment trend.

In the United States, digital payments penetration is already at 78% for 2020. Emerging markets have significant catching up to do in the coming years.

Overall, the industry trend is likely to remain positive, and PayPal is one of the top stocks to consider.

There are two main reasons that have contributed to the recent sell-off.

First, there have been concerns about the company’s ability to sustain its growth trajectory.

Furthermore, this concern was exaggerated because PayPal announced in October that it’s likely to buy Pinterest (PINS). While PayPal has backed off from the potential acquisition, it does indicate that the company is looking at the inorganic route to accelerate growth.

PayPal is a Cash Flow Machine

A key reason to be bullish on PayPal is the company’s cash flow potential.

For Q3 2021, PayPal reported $1.3 billion in free cash flows. Further, at the end of the quarter, the company had $20 billion in cash and equivalents.

Another note is that PayPal generated $0.21 in free cash flow for every $1 in revenue. The company is targeting revenue of $50 billion by 2025. If the same free cash flow conversion rate is assumed, the company is positioned to deliver at least $10 billion in annual FCF.

It’s also worth noting that for 2021, the company has guided for revenue of $25.3 billion to $25.4 billion. Assuming that it can achieve a revenue target of $50 billion, PayPal is positioned to grow at a compound annual growth rate (CAGR) of 18% through 2025.

For the current quarter, the company’s revenue growth was 13%. It seems entirely likely that growth will accelerate.

The first reason is the cash buffer and sustained cash inflow. This will allow PayPal to make significant investments and pursue potential acquisitions.

Another reason is the potential in emerging markets. Digital payments are at an inflection point of growth globally. PayPal estimates that the total addressable market is $110 trillion. Therefore, achieving or surpassing the $50 billion target is realistic.

In terms of specific business highlights for Q3 2021, Venmo has teamed up with Amazon (AMZN) to enable customers in the U.S. to pay with Venmo at checkout. This is a growth trigger for Venmo for 2022 and beyond.

Cryptocurrency Driven Growth

Recently, Mastercard (MA) announced that it’s partnering with leading digital cryptocurrencies companies across Asia-Pacific.

The objective is to launch the region’s first crypto-linked payments card. As the adoption of cryptocurrency increases at a robust pace, more companies are likely to introduce crypto payment options in the coming years.

PayPal has already enabled buying, selling, and holding for some major cryptocurrencies.

I would not be surprised if digital payment is enabled in crypto in the coming years. This will serve as another growth catalyst. PayPal is already expanding cryptocurrency support to new regions.

Wall Street’s Take

Turning to Wall Street, PayPal has a Strong Buy consensus rating, based on 22 Buys, four Holds, and one Sell rating assigned in the past three months. The average PayPal price target of $279.08 implies 31.7% upside potential.

Bottom Line

PayPal has ambitious targets, and the company has the financial flexibility to pursue aggressive growth. There is ample scope for digital payment penetration in developing economies. PayPal is well-positioned to benefit.

From an investor perspective, the correction presents a buying opportunity. Considering its free cash flow potential, PayPal stock is likely to be a long-term value creator.

Disclosure: At the time of publication, Faisal Humayun did not have a position in any of the securities mentioned in this article.

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