If you’d been offered the opportunity to buy shares in Paypal (PYPL:NASDAQ) on a single-digit PE (price to earnings) at pretty much anytime during the past five years, you’d probably have jumped at the chance.

This was a high-growth global leader in digital payments when the world was going online. As far as profitable bets on the future go, this was one to cherish.

In early 2021, the stock was ona PE of nearly 70, and it has generally floated around the 25 to 35 mark in the past.

The world has since spun, and it has become apparent that defending its profitable payments patch has been trickier that previous hubris suggested. If global lockdowns were a win for PayPal, reopening has been a catastrophe.

Since peaking at near-$310 in July 2021, shares in the digital payments platform have sunk to levels not seen since 2017, a staggering fall from grace. PayPal has drawn optimism from largely robust consumer spending, which should improve further as inflation continues to cool.

Underwhelming margins have been analysts’ chief worry, as lower margin services revenues have held up better, while growth has limped along.

This is changing. As recent (1 November) third quarter results showed, operating margins are showing encouraging signs of repair, averaging around 16% this year after falling to 13.8% in 2022. Analysts see scope for more than 20% ahead as PayPal execs attack a bloated cost base.

New chief executive Alex Chriss (replacing retiring founder Dan Shulman) ‘struck the right note and articulated well the challenges facing the company and described a sound framework for improving growth and profitability,’ said JPMorgan analyst Tien-tsin Huang regarding the third quarter statement. Analysts at broker William Blair were also impressed by Chriss’ ‘narrowed focus on profitable growth’.

Forecast data from Koyfin shows full year estimates have been moving higher in recent months for 2023, 2024 and 2025. This implies a PE of 9.7 for 2024 and earnings per share growth of around 12% in 2024 and 2025, with scope for upside surprise if costs can be addressed quickly.

Sure, management may not be able to cut costs as planned, and maybe rival payments services continue to eat its lunch, these are real risks. Yet in a world where hacking and identity thief is equally real, people are likely to use services they know and trust, and PayPal has earned its reputation over many years.

A rerating to a still modest PE of 12 would imply a $75 share price over the next 12-months, roughly in line with analyst’s $78 price targets, 35% to 40% up from here. A PE of 15 would imply a near-$100 share price. [SF]

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