I’ve been looking at PayPal (NASDAQ: PYPL) as a potential quality stock for my portfolio. PayPal’s share price has fallen recently though, and is now down over 17% this year.
Has the share price weakness presented me with a buying opportunity?
PYPL and its results
PayPal is used by many as its electronic payment solutions are in high demand for online transactions. In fact, it has 416m accounts and processed a huge $310bn in payment volume in its third quarter. However, on release of its recent results, the share price fell over 10%.
Net revenue grew 13% in the quarter compared to the same period last year. Total payment volume increased by an impressive 24% too. But its adjusted operating margin fell over 3% to 23.8%, and net income only grew 3%.
Guidance for the full year was for net revenue to grow 18% to $25.3bn, and adjusted earnings per share (EPS) to rise 19% to $4.60. However, it was the company’s guidance for 2022 that was the catalyst for the share price fall. Analysts were expecting revenue of over $31bn for next year, but PYPL guided for growth of about 18%, meaning revenue will be around $30bn.
Results were mixed, then, but nothing too alarming.
Growth initiatives to boost PayPal’s share price
I consider PYPL a quality business with a high net profit margin. It has an excellent network effect due to the number of active accounts using its services. Many online businesses accept PayPal’s payment solutions too. This creates an economic moat for the business, like Auto Trader that I wrote about here.
Indeed, the largest retailer in terms of market value, Amazon, will start allowing PayPal users to make purchases on its website next year through PayPal’s Venmo app.
The payments giant has also diversified its business in the cryptocurrency market recently. Customers in the US can now buy, sell and hold four different cryptocurrencies on Venmo, including the largest cryptocurrency by value, Bitcoin.
The acceleration of e-commerce after the pandemic should also boost growth for PayPal’s online payment solutions.
Is the share price good value?
I think the issue with PYPL has been its rich valuation. So, when the company’s guidance for growth next year came in under analysts’ expectations, the share price reacted by falling over 10%.
On a forward price-to-earnings (P/E) basis, the shares are valued on a multiple of almost 42. I view this as high, but if the company can continue growing, the valuation should fall. Forecasts for EPS growth in 2022 are set at around 16%, leading to the P/E ratio falling to 36. I think PYPL could beat this 16% growth rate in earnings, which would make the stock cheaper based on today’s valuation.
Is this stock a buy?
I think the recent PayPal share price weakness has presented me with a buying opportunity. Although the guidance for next year was lower than analysts’ expectations, growth is still respectable. For a business that has an excellent economic moat, and with a number of growth initiatives, PYPL is a buy for my portfolio.
Dan Appleby owns shares of Auto Trader. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Amazon, Auto Trader, and PayPal Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.