PayPal Holdings, Inc.’s (NASDAQ:PYPL) price-to-earnings (or “P/E”) ratio of 47.3x might make it look like a strong sell right now compared to the market in the United States, where around half of the companies have P/E ratios below 14x and even P/E’s below 8x are quite common. Nonetheless, we’d need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.
PayPal Holdings hasn’t been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You’d really hope so, otherwise you’re paying a pretty hefty price for no particular reason.
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Is There Enough Growth For PayPal Holdings?
The only time you’d be truly comfortable seeing a P/E as steep as PayPal Holdings’ is when the company’s growth is on track to outshine the market decidedly.
Retrospectively, the last year delivered a frustrating 58% decrease to the company’s bottom line. As a result, earnings from three years ago have also fallen 17% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
Turning to the outlook, the next three years should generate growth of 34% each year as estimated by the analysts watching the company. That’s shaping up to be materially higher than the 9.6% each year growth forecast for the broader market.
With this information, we can see why PayPal Holdings is trading at such a high P/E compared to the market. Apparently shareholders aren’t keen to offload something that is potentially eyeing a more prosperous future.
The Bottom Line On PayPal Holdings’ P/E
Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
We’ve established that PayPal Holdings maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren’t under threat. Unless these conditions change, they will continue to provide strong support to the share price.
It is also worth noting that we have found 3 warning signs for PayPal Holdings that you need to take into consideration.
You might be able to find a better investment than PayPal Holdings. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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