Buy the drop in this Fintech stock during the Nasdaq bear market?
The war on cash, a phrase that refers to the shift from physical currency to digital payments, is in full swing. By 2030, the mobile payment market is expected to reach $588 billion, a compound annual growth rate (CAGR) of 35.3% from 2022, according to Grand View Research. Understanding this age-old trend, cautious investors should be very intrigued after observing the Nasdaq Compound fall of 21% since the beginning of the year.
With many financial technology (fintech) stocks currently trading at historic lows, long-term investors have plenty of promising buying opportunities. One company in particular PayPal Credits (PYPL 1.20%), has caught my attention lately. The fintech giant is not only highly profitable and cash flow positive, but it also rules 50.3% of the online payment processing environment. And despite its high-end positioning in a market with massive secular growth, the company has lost 53% of its value since the start of the year.
Let’s dive into where PayPal is and whether it’s a smart investment right now.
What’s new for PayPal?
On July 27, shares of PayPal rose more than 10% after news surfaced that an activist investor, Elliott Management, was steadily hoarding shares. It is suspected that the investment firm is planning to take a large stake in the business so it can accelerate PayPal’s cost-cutting measures. While this could be interpreted as good news for the mobile payment company, I prefer to focus on the underlying fundamentals of its business.
According to its first-quarter earnings report, the company’s total sales rose 7.5% year-over-year to $6.5 billion, and its diluted earnings per share contracted. 27.9% to end at $0.88. Typical of many fintech companies today, management cited a host of reasons why growth is slowing, including weak e-commerce, eBayit is (EBAY -1.04%) continued transition to its own payment platform and rampant inflation that is dampening consumer spending.
In other key metrics, PayPal’s total payment volume (TPV) grew 13.1% to $323.0 billion, and it added 2.4 million new accounts in the quarter. to bring its total to 429 million.
Investors should expect a bumpy ride for the rest of 2022 – Wall Street analysts estimate the company’s total revenue will grow 11.1% year-over-year, until $28.2 billion, and its earnings per share will decline 16.3% to $3.85. The story should improve next year, however, with analysts predicting revenue and net income growth of 16% and 23.1%, respectively. PayPal is set to release its second quarter earnings report today.
Do I recommend buying PayPal today?
For several reasons, I urge investors to consider buying PayPal stock now. First, unlike most of its competitors, the company was extremely profitable and cash flow positive, generating $1.1 billion in free cash flow (FCF) in its first quarter alone. Second, PayPal is a dominant force in a rapidly growing market, and the company continues to diversify its business with offerings like peer-to-peer payment platform Venmo and a buy now, pay later option. Finally, the stock has a price/earnings multiple of around 29 at the moment, a steep discount from its five-year average of over 57.
Clearly, many investors have temporarily fallen in love with this fintech juggernaut, but that doesn’t mean savvy investors should shy away today.
Luke Meindl holds positions in PayPal Holdings. The Motley Fool holds positions and recommends PayPal Holdings. The Motley Fool recommends Nasdaq and eBay and recommends the following options: July 2022 short calls at $57.50 on eBay. The Motley Fool has a disclosure policy.