PayPal Stock: Buybacks And Efficiencies To Boost Returns (NASDAQ:PYPL)

On PayPal Holdings, Inc.’s (NASDAQ:PYPL) most recent quarterly report on August 2nd, the company reported earnings per share loss of $0.29 despite growing revenues by 9%. The loss was attributed to the negative impact of a tax charge related to acquired intellectual property and losses in its investment portfolio. These are generally one-time charges and should not affect earnings in the next quarter.

Despite the recent quarterly loss, PayPal is on the verge of cutting expenses to increase operational efficiency, which should lead to applying these cost savings towards high-conviction opportunities for growth. With their focus on strategic initiatives such as expanding their Pay Later program, I believe PayPal can go back to growing its revenues around 13% over the next five years.

Analysis

Buy Rating: I have a Buy rating for PayPal’s stock, with a five-year target price of $202 per share.

In my analysis of PayPal’s stock, I believe the company can achieve a 15% net margin with its renewed operational efficiencies and strategic initiatives. I’m estimating that the stock’s price-to-earnings ratio (“P/E”) has room to expand from 29 to 32 as its operational efficiencies are reflected in their financials and as the overall market recovers. With the board of directors’ renewed commitment of $15 billion to the company’s share repurchase program, I am estimating a decrease in outstanding shares by approximately 148 million shares based on current prices, which should provide a boost to earnings by 14% and returns by 25%.

Below is a table contrasting the company’s current metrics and stock price to the 5-year estimate:

PayPal	Current* (as of 8/15/22)	5-Year Estimate
Revenue (in millions)	$25,370	$41,916
Net Margin (%)	16.43%	15.38%
Net Income (in millions)	$4,168	$6,447
# Outstanding Shares	1,184,000,000	1,020,000,000
Net Income per Share	$3.52 per share	$6.32 per share
Price/Earnings (PE) Ratio	28.7	32
Stock Price	$101.10	$202.25

Click to enlarge

Source of company metrics: Morningstar, PayPal

*Current metrics based on fiscal year-end 2021

Author’s Note

The purpose of my analysis is to provide a concise and transparent calculation in deriving a price target in the future, which in my hope will show the reader what their potential return is if they were to buy the stock (for Buy ratings) at current prices.

As a long-term investor, I provide a 5-year price target. In identifying a stock for a Buy rating, I look for stocks that can double in price within 5 years. This would produce close to a 20% annual return, which would still exceed the market’s long-term average annual return of 8.91%.

When estimating a target price in the future, I try to be as transparent as possible in the methodology and metrics I use in my analysis and research to gain the reader’s confidence in my conclusions. This is a methodology that I have successfully used for over 25 years as an investment adviser and portfolio manager through the bull market of the 1990s, the dot com bubble, the credit crisis of 2008-2009 and more recently through the Great Resignation.

To better understand how to read the table above, read my previous article Meta: Attractive Valuation.

*Disclosures: Author is not providing investment advice via this report. This report is not a solicitation to the reader to purchase or sell this stock. Author does not guarantee any returns. The 5-year estimate in this report is an estimation based on proprietary methodologies and is not guaranteed. Reader should consult a financial advisor before making any trades related to this stock. Readers of this report attest that they rely on their own conclusions with respect to any actions (buy, sell or hold) they take regarding this stock.