We pitched PayPal (PYPL:NASDAQ) roughly a year ago, arguing that even in the face of fierce payments competition, a single-digit PE (price to earnings) multiple was too tempting to ignore.
This week, the stock hit $87.77, its highest level in two years and putting the trade’s gain at more than 60%.
WHAT HAS HAPPENED SINCE WE SAID BUY?
A lot of operational progress and plenty of share buybacks worth close on $5 billion since the start of the year. Most recent third quarter 2024 trading illustrates that PayPal remains a strong competitor in a tough payments world where, so far, consumer spending has held up reasonably well.
This is reflected in total payment volumes growth declining to 11% year-on-year, but improving transaction margin dollars, up 8% year-on-year. That last figure is interesting because it effectively tells us that while gross transactions are growing more slowly, they are becoming more profitable for the company, a crucial part of PayPal’s structural rethink.
Elsewhere, there was news of partnerships with Amazon (AMZN:NASDAQ) (a checkout deal for its Prime operation) and Shopify (SHOP:NYSE), which should bolster volume growth down the line, and the launch of PayPal Complete Payments in China and Hong Kong.
WHAT SHOULD INVESTORS DO NOW?
The backcloth for digital payments remains fairly bullish, in our view, as e-commerce takes an increasingly large slice of overall consumer spending but it’s hard to argue against the enormous competition in the space. PayPal has done reasonably well to stiffen operating margins from around 15.4% to 18.2%, as high as they’ve ever been, so further upside here looks limited to us.
That suggests that PayPal’s glory growth days are behind it as future earnings track closer to single-digit revenue growth. A consensus analyst price target of $89.57 implies a meagre 2% upside to current levels, and while we don’t put too much weight on this as a valuation measure, it is another grain of doubt to add to the mix.
In short, the best of the recovery story has been had so it is time to take profit and look for better opportunities elsewhere.
These articles are provided by Shares magazine which is published by AJ Bell Media, a part of AJ Bell. Shares is not written by AJ Bell.
Shares is provided for your general information and use and is not a personal recommendation to invest. It is not intended to be relied upon by you in making or not making any investment decisions. The investments referred to in these articles will not be suitable for all investors. If in doubt please seek appropriate independent financial advice.
Investors acting on the information in these articles do so at their own risk and AJ Bell Media and its staff do not accept liability for losses suffered by investors as a result of their investment decisions.
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