PayPal Stock: Boom And Bust Reset

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Investment Thesis

PayPal Holdings, Inc. (NASDAQ:PYPL) reported a rather underwhelming Q1 card that beat the consensus estimates on revenue. But, it was a hugely downbeat metric, to begin with. Hence, the beat wasn’t surprising but was still welcomed by investors. However, management downgraded Q2’s guidance and pulled its medium-term outlook.

Yet, the stock didn’t break convincingly below its COVID bottom, as dip buyers returned to defend PYPL stock. In a pre-earnings article, we highlighted that the market would “force” the COVID bottom. It did just that.

Therefore, despite what seemed like hugely disappointing guidance in the near- and medium-term, PYPL stock remained steadfast last week.

We can’t tell you whether PYPL force will eventually break the COVID bottom and force a bear trap before reversing. However, we think the risk/reward proposition for PYPL stock looks reasonable moving ahead. Still, we believe PYPL stock should remain in the penalty box through H2’22. However, it could get re-rated as it exits Q4’22 when the comps are expected to become more manageable.

Therefore, we reiterate our Buy rating on PYPL stock.

PayPal Needs To Deliver Its Q2 Guidance

PayPal consensus estimates (by FY) % (S&P Capital IQ)

PayPal consensus estimates (by FQ) % (S&P Capital IQ)

Even though PayPal decided to pull its medium-term forecast while revising its Q2 guide, we weren’t surprised. Management requires a reset in its model that was presented in February 2021. It highlighted that the macroeconomic environment has worsened, and e-commerce spending has decelerated dramatically. Coupled with the ongoing Russia-Ukraine conflict that exacerbated inflation impacting consumer discretionary spending, pulling its outlook makes a lot of sense. Furthermore, PayPal CFO John Rainey will depart for Walmart (WMT) soon. Therefore, it’s sensible for PayPal CEO Dan Schulman to await the appointment of Rainey’s permanent successor before committing to a revised outlook. He needs to get his new CFO on board, and we think investors cheered PayPal’s prudence in its approach.

Nonetheless, not committing to a revised medium-term outlook could introduce some unexpected headwinds if views between the Street and management differ markedly. Therefore, it’s imperative for management to meet its Q2 guidance to regain investors’ credibility.

PayPal’s 5Y revenue CAGR amounted to about 18.5% in the last twelve months. However, given the culmination of headwinds discussed above, PayPal’s growth has decelerated significantly. However, the bar has been set so low for Q2, given PayPal’s revised guidance. Therefore, management needs to meet/beat its revenue growth of 9% YoY next quarter. The Consensus estimates suggest that PayPal’s revenue growth could reach an inflection point in H1’22 before reversing higher. In addition, PayPal also pulled its FY22 revenue forecast downwards. Nonetheless, its guidance still suggests PayPal potentially exiting FQ4’22 with revenue growth of 15% YoY. While it still falls short of PayPal’s 5Y average, management remains confident of lapping easier comps in FY23.

The consensus estimates suggest that PayPal’s revenue growth of 17.8% YoY in FY23 could reverse higher. Furthermore, PayPal’s profitability and FCF margins are also expected to reverse higher through FY23, as PayPal’s growth tracks more in line with its 5Y average. Notably, PayPal’s adjusted EPS and FCF are expected to increase by 27.2% and 40.4% in FY23. As a result, the consensus estimates expect PayPal to grow its margins faster than the market and assume significant operating leverage gains. Given that the market is forward-looking, we are pretty confident that we could have seen the bottom in PYPL stock.

Is PYPL Stock A Buy, Sell, Or Hold?

PYPL stock price chart (TradingView)

PYPL stock NTM normalized P/E and NTM FCF yield % (TIKR)

PayPal remains solidly profitable and FCF positive despite digesting its headwinds. Furthermore, its growth premium has moderated significantly as PYPL stock last traded at an NTM normalized P/E of 20.9x (market median P/E 16.1x). However, investors should note that PYPL stock had consistently traded at a premium against the market, given its growth rates. So, we should expect PayPal to find its mojo again moving forward.

Furthermore, its NTM FCF yield has improved to 5.67%, even higher than Meta (FB) stock’s 4.37%. So, PayPal FCF’s profitability remains robust, which should help defend the stock against further steep declines.

Moreover, its long-term price action suggests a potential bottoming process, as the market makers forced the COVID bottom. PayPal stock needed to digest its spectacular pandemic-driven gains to reset the market expectations moving forward. And we think it has been reset.

As such, we reiterate our Buy rating on PYPL stock.