Unveiling PayPal Holdings (PYPL)'s Value: Is It Really Priced Right? A Comprehensive Guide

A deep dive into PayPal Holdings' intrinsic value, financial strength, profitability, and growth prospects

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PayPal Holdings Inc (PYPL, Financial) has experienced a daily loss of 2.7% and a three-month loss of 13.46%. Despite this, its Earnings Per Share (EPS) stands at 3.57. The question then arises: Is this stock significantly undervalued? Let's delve into a valuation analysis to answer this question.

Company Introduction

PayPal Holdings, spun off from eBay in 2015, specializes in providing electronic payment solutions to merchants and consumers, focusing on online transactions. By the end of 2022, the company boasted 435 million active accounts. PayPal Holdings also owns Venmo, a popular person-to-person payment platform. Interestingly, the company's stock price stands at $57.34, while the GF Value, an estimation of its fair value, is $143.78. This discrepancy suggests that the stock might be significantly undervalued, warranting a deeper exploration of the company's value.

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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:

  1. Historical multiples (PE Ratio, PS Ratio, PB Ratio and Price-to-Free-Cash-Flow) that the stock has traded at.
  2. GuruFocus adjustment factor based on the company's past returns and growth.
  3. 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 appears to be significantly undervalued based on the GuruFocus Value calculation. At its current price of $57.34 per share, PayPal Holdings has a market cap of $63 billion, suggesting that the stock is significantly undervalued. As PayPal Holdings is significantly undervalued, the long-term return of its stock is likely to be much higher than its business growth.

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Financial Strength

Investing in companies with low financial strength could result in permanent capital loss. Therefore, investors must carefully 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 67.39% of 506 companies in the Credit Services industry. Based on this, GuruFocus ranks PayPal Holdings's financial strength as 6 out of 10, suggesting fair balance sheet.

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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 55.09% of 383 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 72.38% of 496 companies in the Credit Services industry. PayPal Holdings's 3-year average EBITDA growth rate is 8.3%, which ranks better than 50.35% of 284 companies in the Credit Services industry.

ROIC vs WACC

Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. 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. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, PayPal Holdings's return on invested capital is 16.66, and its cost of capital is 12.28.

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Conclusion

In summary, the stock of PayPal Holdings (PYPL, Financial) appears to be significantly undervalued. The company's financial condition is fair and its profitability is strong. Its growth ranks better than 50.35% of 284 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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Disclosures

I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours. Click for the complete disclosure