PayPal Stock: The Clock Is Ticking For Its Meta Moment To Appear (NASDAQ:PYPL)

I am a PayPal (NASDAQ:PYPL) bull who believes their Meta Platforms (META) moment will occur, but I am an unhappy shareholder. After PYPL’s Q4 earnings, I posted a tweet where I expressed my dissatisfaction directly to Alex Chriss (PayPal CEO). After going back and rereading the Q4 2023 conference call transcript (can be read here) I am still convinced that the commentary negatively overshadowed the operational performance PYPL delivered and the value proposition in PYPL’s shares. Companies that become irrelevant don’t grow, yet PYPL’s revenue grew 8.19% YoY as they added $2.25 billion in total revenue. Over the past decade, PYPL has experienced YoY revenue growth, while always turning a significant profit. Over the past several years, Mr. Market has lost confidence in PYPL despite billions being allocated to buybacks, continued top-line revenue growth, and the implementation of a succession plan by hiring Alex Chriss.

Shares of PYPL have declined by -21.32% over the past year, and since reaching $308.53 on 7/23/21, shares of PYPL have lost -80.83% of their value. Today, the share price of $59.16 is the equivalent of where shares traded back in the summer of 2017 when PYPL was generating around $13 billion in revenue and $1.8 billion in profits. As a shareholder, I find this frustrating because PYPL continues to look like an undervalued gem. I am still very bullish on PYPL as I believe there is tremendous value to be unlocked in its shares, but after the most recent earnings call the clock is ticking because confidence was the last thing it generated. I stuck with META as many wrote them off under $100, and I believe PYPL can still have a META type recovery, but management needs to take the bull by the horns and play offense rather than defense.

Following up on my previous article about PayPal

I wrote my last article about PYPL in October (can be read here) and discussed why I continued to add to my position despite the bearish sentiment in its share price. PYPL was and still is one of my top value ideas, as the share price is too distorted from the underlying fundamentals. In this article, I am going to discuss why I am still long PYPL, why I felt the earnings call overshadowed PYPL’s operational performance, and what I think management needs to do to get Mr. Market’s attention.

The risks to investing in PayPal

While the fundamentals make a compelling case as to why shares of PYPL represent a value opportunity, there are many risks to the investment case. First off, Mr. Market is not impressed with PYPL, and the sentiment continues to be bearish. It’s going to take a lot for PYPL to instill confidence, considering how deep the negative trend is. PYPL faces legal, regulatory, and compliance risks as its business is subject to complex laws and regulations that are continuously being updated. PYPL has significant crypto exposure, especially with their PayPal USD (PYUSD), a U.S dollar-denominated stablecoin. If the powers that be classify PYUSD as a security, PYPL could be impacted due to the relationship with the PYUSD Issuer as they could face regulatory or other enforcement actions, potential fines, or reputation blemishes. PYPL also faces risks in the regulation of payments because they hold licenses to operate as a money transmitter. If PYPL fails to keep up to date with compliance regulations, it could impact their ability to operate in specific regions. PYPL also faces increasing competition in the payment space from emerging firms, traditional financial institutions, and credit card companies. As more options emerge for payments, whether peer-to-peer or purchasing goods and services, PYPL faces more alternatives to their services. Cybersecurity could be the biggest threat to PYPL as they are a prime target for hackers, and if there is a large data breach, individuals and businesses could lose confidence in making PYPL their primary payment vendor.

Despite the weakness in shares of PayPal, I am still bullish and see immense value in its shares

Shares of PYPL are certainly not where I hoped they would be by now. I started my position in August of 2023, and it’s been difficult to watch Mr. Market continue to discount shares this heavily. Currently, my average price is $58.08, so I am up 1.84%, which has significantly trailed the S&P 500. I have been able to manufacture income by writing covered calls against my shares and have generated about 1.94% on my investment net after commissions and exchange fees. PYPL isn’t a company in decline, and I like to think I can stay solvent longer than others can maintain irrationality. There was a lot to like about the operational performance and even more to get excited about regarding the valuation, and that’s why I am trying to forget about the earnings call and focus on the positives.

I take a numbers-driven approach when evaluating companies, and for me, the fundamentals matter. It’s hard for me to accept the bear thesis as PYPL not only delivers a top and bottom line beat in Q4, but delivers a strong 2023 fiscal year. In Q4, PYPL generated $8 billion in revenue, which came in ahead of the consensus estimates by $130 million and represented 8.1% in YoY growth. PYPL is still growing annually and quarterly, yet some investors are writing this company off as dead money. PYPL also produced $1.48 in non-GAAP EPS, which was $0.12 more than what the analysts were expecting. The key operational highlight for me was that the total payment volume (TPV) increased 15% in Q4 to $409.8 billion and 13% YoY in 2023 to $1.53 trillion. This single metric alone represents PYPL’s continued relevancy in the digital economy, as more than $1.5 trillion worth of transactional payments utilized PYPL as a conduit. In addition to the actual dollar amount of transactions, the volume of transactions increased. In 2023, PYPL reached 25 billion payment transactions, which was a 12% YoY increase. This is a company that grew its TPV, and its number of payment transactions, grew its top-line revenue by 8.19% YoY, and generated billions in profits.

When you purchase shares of a company, you are paying the present value for all their future profitability as you become an equity stakeholder. You should want to pay the lowest price for the largest amount of future profitability. From an operational perspective, PYPL represents an extreme value, in my opinion. Today, you can purchase shares at a $63.4 billion valuation, which is an 11.54 forward P/E on their expected EPS. Paying $63.4 billion for a company that is generating $29.77 billion in revenue, $5.45 billion in EBITDA, $4.22 billion in free cash flow (FCF), and $4.25 billion in net income is relatively cheap in my opinion. In PYPL’s guidance, they stated that revenue should grow by roughly 6.5% in Q1 and that they are projecting to generate roughly $5.10 in non-GAAP EPS for the year. This is also a company with an impeccable balance sheet considering they have 93.85% of their total long-term debt covered by their cash on hand, with another $4.98 billion allocated to short-term investments and $3.27 billion to long-term investments. This is a company that generates organic growth and profitability hand over fist without leveraging themselves.

When I compare PYPL on a current and forward basis against Block Inc (SQ), Visa (V), Mastercard (MA), Global Payments (GPN), and Adyen N.V. (OTCPK:ADYEY) shares look undervalued. I look at the current price to FCF and forward P/E ratios. This tells me how much I am paying for the current amount of FCF being produced and what I am paying for the forward earnings. PYPL is trading at 15.02x its 2023 FCF. To put this into perspective, SQ has a market cap of $48.46 billion, and in 2023, they generated -$50.2 million in FCF and posted a profit of $9.8 million, yet PYPL produced $4.22 billion in FCF and has a market cap of $63.4 billion and trades at 15 times its FCF. When I look at this peer group, PYPL trades at the best value for its current level of profitability, as it would take 15 years for PYPL to generate its entire market cap in FCF.

When I look at the forward P/E PYPL is trading at 11.53x 2024 earnings, 10.52x 2025 earnings and 9.65x 2026 earnings. SQ, V, and MA all trade between 24-33x 2024 earnings while the market is placing a 52.87 multiple on ADYEY. Global Payments trades at a similar valuation to PYPL, which is interesting, but this is why I also look at the price to FCF. GPN is trading at a 21.59x price to FCF compared to 15.02x for PYPL. When I look at these metrics, I think there is tremendous value to be unlocked and that if PYPL can continue to grow its profitability and deliver operationally, the market will eventually give them a higher valuation.

What I didn’t like about the earnings call and what I wish Alex Criss had done

From all of the earnings calls I have listened to and the transcripts I have read, the Q4 2023 PYPL earnings call was not what I was expecting, and the market reaction seems to agree with me. I suggest that you read through the transcript that I linked to earlier because there was a lot of good information throughout the call, but I will be focusing on some aspects I wish were either not said or rephrased.

These are the comments throughout the conference call that Alex Chriss and Jamie Miller stated that I wish were either left out or rephrased:

• As a company, we will build back a track record of delivering on our commitments.
• We’ve had limited penetration of SMB full-stack processing to date due to the lack of a strong product
• We really have to improve the value proposition for our consumers
• I guess what I’d say is we are just doing too many things and our biggest opportunity is that we have to make decisions to stop things and to really focus and that gets into market competitiveness.
• We have not invested enough in creating a single platform. That again slows us down when it comes to innovation, and it slows us down when it comes to being able to leverage the data across the ecosystem.
• We are not putting in the expectations into the guidance until we see execution

Alex Chriss and Jamie Miller want to be an open book and transparent, but these six statements took the steam out of the earnings call for me. The share price cratered during the call, and when I go back and look at these comments, they don’t paint the best picture. This isn’t a company that’s unprofitable or struggling with debt repayments. PYPL is very profitable with an impeccable balance sheet. Saying that you need to improve the value proposition for consumers makes it seem as if there are better options available outside of PYPL. The narrative could be interpreted that internally, PYPL focused on too many business aspects, and it got in the way of them delivering strong products. These comments could also be looked at as innovation isn’t a priority and that better opportunities for business needs could be found elsewhere.

I get it, Alex Chriss wants to be as transparent as possible, which I can appreciate. Maybe I am too used to listening to Anthony Noto or Mark Zuckerberg speak, but I was looking for a war-time CEO to come out. The stock price is in shambles, and this was the opportunity for Alex Chriss to come out and address all of the analysts from a position of strength. As a shareholder, I wish he had come out and authorized a one-time buyback with $5 billion of the cash on hand from the balance sheet to signal that Senior Leadership believes that this price is far too low and one of the best places for them to park capital is in buying back more shares than they have already authorized. I think this would have sent a strong message to the market that PYPL has a strong future ahead of them, and this is a management team that is going to deliver an immense value proposition. Instead, we got a conference call that the market didn’t necessarily care for.

As I said, I appreciate that Alex Chriss is going to be transparent, but there is a way to get these points across without taking away from the strong operational performance. I would rather the bullet points to read as the following:

• Our current and future commitments will build a track record of operational strength
• We are confident that we will gain market share in the SMB full-stack processing arena as innovation will drive stronger products
• The value proposition consumers expect from PayPal and its products will continue to advance through future innovations in both the personal and business segments
• We will focus on the products and services that deliver the largest benefits for our customers and the strongest opportunities for PYPL to take additional market share
• To drive future innovation, we are investing in creating a single platform that will allow us to more effectively leverage our data to create stronger products for our customers
• We believe PYPLs best days are ahead of it and will update guidance accordingly as the team executes on our goals

Conclusion

While I was less than thrilled with the PYPL earnings call, I do believe in this management team and PYPL’s ability to drive value for its customers and shareholders. I think the valuation for PYPL is too low, and that shares bottomed out in the low $50s. It may take several quarters, but I think that PYPL still has the ability to have a META-like recovery. I am giving PYPL until the end of 2024 before I consider exiting the position unless something drastically changes in their revenue growth and profitability. Until then, I will continue writing covered calls to generate income and potentially add to my position if there is a big pullback. The next earnings call can’t come quickly enough, as I am looking forward to seeing the progress PYPL is making.