Stocks can go nowhere slowly, then leap higher suddenly.
Long-term investing can be especially difficult when the broader market leaves a stock you own in the dust. That’s been the story for investors in PayPal Holdings (PYPL -1.80%) over the past five years. The S&P 500 has doubled in value, while PayPal has matched that with a pitiful 50% decline.
But just because the past was ugly doesn’t mean the future can’t be bright. Investors would be wise to look closely at PayPal and where its business is heading. New leadership is beginning to show signs of innovation within the company, and the stock is so cheap that even moderate success could launch shares to spectacular investment returns.
It’s not always easy to buy the stock others don’t want, but there are good reasons to consider owning PayPal today. Here they are.
PayPal is very much alive
PayPal was one of the original internet payment companies with a history dating back to the late 1990s. If you’re a glass-half-full person, its long-standing position in a highly competitive payments industry illustrates the company’s competitive advantages and staying power. Those who see things as half empty will point to PayPal being a dinosaur that has lost its way against newer, fresher competitors.
While one could argue that PayPal isn’t the flashiest name in payments, the numbers show the business has a strong pulse today. It has continually attracted users, even in recent years. At the end of 2019, the company had 305 million active accounts. Today, that has risen to 427 million.
And revenue and earnings have done nothing but march higher, despite the stock’s decline trying to signal otherwise:
PYPL revenue (TTM) data by YCharts; TTM = trailing 12 months; EPS = earnings per share.
Analysts expect PayPal to grow earnings per share by an average of 15% annually for the next three to five years, so it’s not like the market believes the business is about to fall off a cliff. From this standpoint, it looks like its greatest crime is that its image is stale. That could soon change.
Innovation is shining through
PayPal has all but admitted it needed some fresh vision at the top, which helps explain its transition to new CEO Alex Chriss. He came from Intuit, which has seemingly helped PayPal inject new ideas into the business that are beginning to show long-term promise.
Two areas that stand out are its new efforts to use artificial intelligence (AI) and advertising. Both require quality data to be effective, and PayPal has that in spades because it sees the transactions and buying patterns of over 400 million accounts.
Management plans to build on its existing product, Advanced Offers, which analyzes data to provide potential customers with special deals and incentives to encourage purchases. The advertising venture was announced weeks ago, so it’s far too early to judge its success or failure.
However, Chriss has spoken about the company’s need to leverage its data better, and this is an encouraging first step that could add notable growth potential to the business if successful.
The stock’s valuation sets up investors for stellar returns
PayPal’s long-term investment returns will depend on how well its new ventures gain traction. The good news is that the stock is cheap, and the core business is poised to grow enough to generate solid returns without factoring in new ideas or projects.
Today, the stock trades at a forward price-to-earnings (P/E) ratio of just under 15. Assuming the company delivers on analyst expectations for 15% annualized growth, the resulting price/earnings-to-growth (PEG) ratio of 1.0 underlines how attractive PayPal is for its expected growth.
Management is also putting its money where its mouth is. It plans to spend 100% of its cash flow this year on share repurchases. This should instill confidence in investors and help drive earnings higher, making it all the more likely that PayPal hits estimates.
The reality of long-term investing is that companies go through ups and downs, and shares can sometimes go a long time without doing much. Then, that same stock can generate years’ worth of investment returns quickly. All investors can do is diversify, follow the fundamentals, and remain patient until there is a reason to move on.
The fundamentals seem to tell investors that PayPal has brighter days ahead.
Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Intuit and PayPal. The Motley Fool recommends the following options: short June 2024 $67.50 calls on PayPal. The Motley Fool has a disclosure policy.