Could This Undervalued Stock Make You a Millionaire One Day?

Investors have soured on this industry-leading enterprise.

Investors have soured on this industry-leading enterprise.

PayPal (PYPL 1.15%) was once on top of the world. Since its spin-off from eBay in July 2015 to their all-time high in July 2021, shares skyrocketed 740%. This means that had you invested $119,000 in the payments business at the spin-off, you would’ve become a millionaire in six short years.

It’s been a totally different story for this fintech stock since reaching that peak. Shares currently trade 81% off that high (as of June 18), as investors have become extremely pessimistic about PayPal’s prospects.

But the stock trades at a dirt cheap price-to-earnings ratio of just 14.9, which is about the cheapest it has ever sold for and a 37% discount to the broader S&P 500. Can the undervalued shares of PayPal make you a millionaire one day?

Don’t ignore the solid fundamentals

If you looked at the stock’s terrible performance, you might assume that PayPal’s business is in decline. That’s just not true.

In 2023, PayPal recorded revenue of $29.8 billion. That was up 8% year over year. And during the first three months of 2024, sales increased by 9%. Perhaps more importantly, the company’s revenue base is significantly higher than it was prior to the pandemic.

PayPal benefits from the growth of digital payments, which continue to proliferate across the global economy. As individuals and businesses see the benefits and added convenience of transacting using non-cash methods, this company gains.

The rise of online shopping also provides a nice tailwind for PayPal. It has a strong industry position in this area. With e-commerce sales set to rise at a rapid 16% yearly clip in the U.S. through the end of this decade, according to Grand View Research, PayPal stands to benefit.

This favorable backdrop should result in much higher total payment volume (TPV) over time. In the first quarter, PayPal processed annualized TPV of $1.6 trillion, which is a gargantuan sum. Even better, each user is transacting more with each passing quarter.

Another obvious indicator that this is a quality business is PayPal’s profitability. In the past five years, the company’s operating margin has averaged a healthy 16.1%. This has helped it generate billions in free cash flow every year. Management plows this cash toward aggressively repurchasing shares.

Competitive landscape

PayPal certainly possesses positive attributes that investors should be mindful of. But that makes one wonder why the stock has gotten absolutely crushed in the past three years.

In my opinion, it has to do with the heightened competition in the payments industry. This is clear if you look at PayPal’s user base. The business has 427 million active accounts (as of March 31), a figure that hasn’t changed much since fourth-quarter 2021. After a huge bump during the pandemic days, the market is now worried that the company will struggle to add more consumers and merchants to the platform.

This is a reasonable fear. PayPal has to stay on top of its game to avoid losing market share to Apple Pay and Alphabet‘s Google Pay, both popular digital wallets from massive tech firms with unlimited financial resources. It’s also not easy on the merchant side, with rivals like Adyen and Stripe providing compelling offerings.

Investors should be aware of the competitive landscape. But given PayPal’s long and successful history leading the digital payments revolution, as well as its current scale and network effects, I think this could work out to be a solid investment over the long term. I’m not entirely sure it can turn you into a millionaire one day, but the cheap valuation is too hard to ignore at this point.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Adyen, Alphabet, Apple, and PayPal. The Motley Fool recommends eBay and recommends the following options: short July 2024 $52.50 calls on eBay and short June 2024 $67.50 calls on PayPal. The Motley Fool has a disclosure policy.

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