PayPal Holdings Inc (PYPL, Financial) experienced a daily gain of 1.6%, despite a 3-month loss of 4.41%. With an Earnings Per Share (EPS) (EPS) of 3.57, the question arises: is the stock significantly undervalued? This article offers a detailed valuation analysis to answer this question. Read on for an insightful exploration of PayPal Holdings' intrinsic value.
An Introduction to PayPal Holdings
Spun off from eBay in 2015, PayPal Holdings Inc (PYPL, Financial) provides electronic payment solutions to merchants and consumers, focusing on online transactions. The company had 435 million active accounts at the end of 2022. It also owns Venmo, a person-to-person payment platform.
At its current price of $60.46 per share, PayPal Holdings (PYPL, Financial) has a market cap of $66.40 billion. Interestingly, the GF Value, an estimation of fair value, stands at $142.11, suggesting that the stock might be significantly undervalued. This sets the stage for a deeper exploration of the company's value, ingeniously integrating financial assessment with essential company details.
Understanding the GF Value
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at. It is calculated based on three factors:
- Historical multiples (PE Ratio, PS Ratio, PB Ratio, and Price-to-Free-Cash-Flow) that the stock has traded at.
- GuruFocus adjustment factor based on the company's past returns and growth.
- Future estimates of the business performance.
We believe the GF Value Line is the fair value that the stock should be traded at. The stock price will most likely fluctuate around the GF Value Line. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher.
PayPal Holdings (PYPL, Financial) stock is believed to be significantly undervalued based on the GuruFocus Value calculation. Because PayPal Holdings is significantly undervalued, the long-term return of its stock is likely to be much higher than its business growth.
Assessing Financial Strength
Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid this, an investor must review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to understand its financial strength. PayPal Holdings has a cash-to-debt ratio of 0.94, which ranks better than 66.8% of 509 companies in the Credit Services industry. The overall financial strength of PayPal Holdings is 6 out of 10, which indicates that the financial strength of PayPal Holdings is fair.
Profitability and Growth
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. PayPal Holdings has been profitable 10 over 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 53.02% of 381 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. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. PayPal Holdings's 3-year average revenue growth rate is better than 73.29% of 498 companies in the Credit Services industry. PayPal Holdings's 3-year average EBITDA growth rate is 8.3%, which ranks better than 53.96% of 278 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 11.8.
Overall, PayPal Holdings (PYPL, Financial) stock is believed to be significantly undervalued. The company's financial condition is fair and its profitability is strong. Its growth ranks better than 53.96% of 278 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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