PayPal Holdings Inc.'s (PYPL, Financial) share price capitulation over the past year started once fake news circulated claiming the company wanted to acquire Pinterest Inc. (PINS, Financial) in a $20 billion deal. The market viewed the transaction as overvalued and started selling the stock aggressively before PayPal publically announced that it had no intention of acquiring Pinterest.
It seems as though investors discovered other fault lines in the stock thereafter and, to be honest, I did as well, but I believe the correction has been overdone and that we could be set for a bullish run.
Last year, I was concerned about PayPal's status as a market leader. I thought it started facing an increasing amount of pressure amid the acceleration of the digital payments sphere due to a technological surge during pandemic lockdowns.
Although I still believe PayPal may lose market share in the long run, I think the market has priced that in by now and it's probably a good time to look at idiosyncrasies at this stage rather than the competitive sphere.
Recent results convey positivity. PayPal managed to post a $30 million revenue beat during its fourth quarter, and the underlying factors look promising. The company's total payment volume grew by an additional 23%, with a 13% increase in monetization. Furthermore, PayPal gained 9.8 million active new accounts in the quarter, including 3.2 million from its acquisition of Paidy.
I could easily see the recent earnings momentum sustain itself as the velocity of M1 and M2 money is picking up rapidly, meaning the global transactional volume is gathering steam, which was to be expected during pandemic reopenings.
Source: St.Louis Federal Reserve.
Valuation and technicals
The proclivity of the median of investors to buy assets when undervalued and to sell assets when oversold prompts me to believe PayPal stock is set for a reversal toward the upside. The stock is trading below its historical price multiples with its price-sales and price-to-cash flow ratios trading at discounts of 47.47% and 59.41%, respectively, suggesting the market hasn't priced in the company's earnings trajectory.
PayPal is also in oversold territory with its relative strength index trading below 30, providing a good entry point if you're a believer in mean reversion.
If you're looking to time the market, then now is your chance. PayPal stock is in oversold territory after a market overreaction. The company's earnings continue to thrive, suggesting PayPal's undervalued status isn't justified.