PayPal Holdings Inc (PYPL, Financial) has seen a daily loss of 5.04%, and a 3-month loss of 3.59%. The company's Earnings Per Share (EPS) stands at 3.57. This article aims to answer the question: is PayPal Holdings significantly undervalued? We invite you to read on for a detailed valuation analysis of the company.
Introduction to PayPal Holdings
PayPal Holdings Inc (PYPL, Financial) was spun off from eBay in 2015 and provides electronic payment solutions to merchants and consumers, with a focus on online transactions. The company had 435 million active accounts at the end of 2022. PayPal Holdings also owns Venmo, a popular person-to-person payment platform. The company's stock price currently stands at $60.08, which will be compared to its GF Value, an estimation of its fair value.
Understanding the GF Value
The GF Value is a proprietary measure that represents the current intrinsic value of a stock. It is calculated based on historical multiples, a GuruFocus adjustment factor based on the company's past performance and growth, and future business performance estimates. The GF Value Line on our summary page gives an overview of the fair value at which the stock should ideally be traded.
According to GuruFocus' valuation method, the stock of PayPal Holdings (PYPL, Financial) is estimated to be significantly undervalued. The GF Value estimates the stock's fair value based on three key factors: historical multiples, an internal adjustment based on the company's past business growth, and analyst estimates of future business performance. If the share price is significantly above the GF Value Line, the stock may be overvalued and have poor future returns. However, if the share price is significantly below the GF Value calculation, the stock may be undervalued and have higher future returns. At its current price of $60.08 per share, PayPal Holdings stock is estimated to be significantly undervalued.
Because PayPal Holdings is significantly undervalued, the long-term return of its stock is likely to be much higher than its business growth.
Evaluating Financial Strength
Investing in companies with low financial strength could result in permanent capital loss. Therefore, it's crucial to review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. PayPal Holdings has a cash-to-debt ratio of 0.94, which ranks better than 66.8% of companies in the Credit Services industry. Based on this, GuruFocus ranks PayPal Holdings's financial strength as 6 out of 10, suggesting a fair balance sheet.
Profitability and Growth
Companies that have been consistently profitable over the long term offer less risk for investors. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. PayPal Holdings has been profitable for 10 out of the past 10 years. Over the past twelve months, the company had a revenue of $28.60 billion and Earnings Per Share (EPS) of $3.57. Its operating margin is 16.68%, which ranks worse than 52.88% of companies in the Credit Services industry. Overall, the profitability of PayPal Holdings is ranked 10 out of 10, which indicates strong profitability.
Growth is probably one of the most important factors in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long-term performance of a company's stock. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. PayPal Holdings's 3-year average revenue growth rate is better than 73.69% of companies in the Credit Services industry. PayPal Holdings's 3-year average EBITDA growth rate is 8.3%, which ranks better than 54.32% of companies in the Credit Services industry.
ROIC vs WACC
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, PayPal Holdings's ROIC was 16.66, while its WACC came in at 11.76.
In conclusion, the stock of PayPal Holdings (PYPL, Financial) is estimated to be significantly undervalued. The company's financial condition is fair and its profitability is strong. Its growth ranks better than 54.32% of companies in the Credit Services industry. To learn more about PayPal Holdings stock, you can check out its 30-Year Financials here.
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