PayPal Holdings, Inc. (PYPL) looks like a great buy, with strong fundamentals and the stock having also formed a bottoming pattern. These two factors could lead to a more than 120% price increase over the next two years.
Cory Mitchell, an analyst with Trading.biz, said, “PayPal sold off 84% from its high in 2021. It traded at an extremely high P/E back then, then earnings faltered in 2022. PYPL went from highly overvalued, to significantly undervalued recently.
“The stock chart has bottomed, and earnings are increasing. Even a return to a conservative P/E ratio based on future earnings puts the stock near $150 over the next couple of years. It currently trades near $67.”
PayPal is trading near its lowest Price/Earnings (P/E) in the last five years. Values have ranged between 14.1 and 133. It currently sits at a P/E of 17.4 and the forward P/E is 13.
Before the stock had its big run higher in 2020 and 2021 (got overvalued), it was trading at a P/E near 50. P/E then went as high as 133 (higher than average) before falling into lower-than-average P/E territory.
The stock reaching a P/E of 30 again is not unreasonable; it has typically traded at a higher P/E. Earnings are also increasing. EPS was $2.09 in 2022 then $3.84 in 2023. Analysts expect $4.66 in 2024 and $5.13 in 2025.
With earnings increasing, that should spark buying interest in the stock, especially when trading at one of its lowest valuations in half a decade.
If earnings of $5.13 come to fruition in 2025, and the stock returns to a more conservative-to-normal P/E of 30, that gives a price target of $150.
Here are some other summary statistics that make PayPal look attractive, especially at the current price:
- 17.5% forecasted yearly EPS growth over the next five years
- Sales have increased an average of 14% over the last five years
- The company has been aggressively buying back shares while the stock price has been low in 2022 and 2023. That means earnings are spread between fewer shareholders.
Technically, the stock is looking poised to move higher. A stock can still drop with strong fundamentals, so Cory Mitchell recommends waiting till the stock stabilizes and starts moving up before buying.
This is the first time in the last five years the stock has traded at this great of a P/E and has formed a significant bottoming pattern.
A rounded bottom has formed over the last several months.
The price action is still quite choppy so investors can consider entry points below $67. Waiting for a deeper pullback, to $60 for example, may mean missing the move, but also provides more reward if the level is reached before moving higher.
There is also the possibility the stock doesn’t move higher. The stock could sell off to an even lower P/E, or future earnings (or estimates) could be lowered making the stock fairly valued (or even overvalued) at this price level.
Consider the exit point, before investing, whether the stock rises or falls.
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