While the technology sector hasn’t been brimming with attractive deals lately, PayPal Holdings Inc. (PYPL) is shaking things up. The company’s stock has recently surged to a new 52-week high, trading near $80 a share for the first time since the first quarter of 2023. The big question now is: can PayPal sustain this momentum and even climb higher?
Several Wall Street analysts believe the answer is a resounding yes. The financial sector, particularly companies like PayPal, is often among the first to benefit from shifts in the economic landscape. The Federal Reserve’s recent interest rate adjustments are already creating favorable conditions for increased transaction volumes and fees, setting the stage for PayPal’s growth.
However, competition is fierce. PayPal operates in a crowded market, facing stiff competition from giants like Visa Inc. (V) and Mastercard Inc. (MA), as well as smaller players like Block Inc. (SQ). Despite this competitive landscape, PayPal’s stock is outperforming its peers, suggesting investor confidence in its future prospects.
The market’s bullish sentiment towards PayPal is reflected in its price action and analysts’ forecasts. Compared to its closest rival, Block, PayPal’s stock is at a new 52-week high while Block’s stock is down significantly from its high.
Earnings per share (EPS) growth forecasts paint a positive picture for PayPal. The company is projected to see a 10% jump in EPS from $1.19 this quarter to $1.30 for the same quarter next year. This growth trajectory is significantly more optimistic than Block’s EPS forecast, which predicts a nearly 50% contraction.
While it’s important to note that PayPal, as a $74 billion company, shouldn’t be compared to the likes of Visa or Mastercard in terms of growth, its upside potential is attracting significant attention. Analysts at Mizuho Financial set a $90 price target on PayPal a couple of months ago, a move that other analysts are now starting to follow. Deutsche Bank has even raised the bar with a $94 price target, indicating a potential 21.2% upside from current levels. This optimistic outlook contrasts with the $70 price target set for Block by New Street Research.
But does PayPal’s business have the strength to deliver on these high expectations? The answer lies in its recent financial performance. PayPal’s latest quarterly earnings report reveals a trend toward a higher price. Revenue increased by 8%, accompanied by a similar expansion in transaction margins, setting the stage for improved profitability in the future.
Key performance indicators (KPIs) also highlight PayPal’s positive trajectory. Total payment volume rose 11% year-over-year to $416.8 billion, and transactions per active account also saw a 11% increase, demonstrating strong activity within the platform despite economic uncertainties.
However, the company did experience a slight decrease of 0.4% in net active accounts, which reached 429 million. This decline may have contributed to some investors’ concerns about PayPal’s growth potential.
Despite this slight dip, PayPal’s strong profit metrics are proving to be more persuasive. The company reported $1.4 billion in free cash flow (operating cash flow minus capital expenditures), a testament to its financial health.
Recognizing the promising future ahead for PayPal, management has committed up to 100% of the company’s free cash flow to a share buyback program, potentially buying back up to $5 billion worth of stock, nearly 10% of its market capitalization. This aggressive buyback program signals management’s belief that PayPal’s stock is currently undervalued and poised for further growth.
Management isn’t the only one betting on PayPal’s success. Institutional investors, including Legal & General Group, are also increasing their holdings. Legal & General Group boosted its position by 3.3% in August 2024, bringing its net position to $501.2 million. Over the past 12 months, a total of $4 billion in institutional capital has flowed into PayPal, a figure that is expected to continue rising.
Overall, PayPal’s strong financial performance, optimistic analyst forecasts, and aggressive share buyback program are painting a positive picture for the company’s future. While competition remains a factor, the current market momentum and investor confidence suggest that PayPal’s stock is poised for further upside growth.
