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PayPal Holdings (PYPL), one of the leading digital payments and financial technology companies, has recently captured attention with its strategic partnership with Amazon Prime’s Buy with Prime feature. This collaboration marks a solid move for PayPal as it seeks to expand its presence in the rapidly evolving e-commerce space, allowing millions of Amazon (AMZN) users to seamlessly integrate PayPal services into their checkout experience.
PayPal also stands to benefit from a broader macroeconomic environment. With the Federal Reserve recently delivering a jumbo rate cut and signaling more cuts to come, digital payment companies like PayPal are well-positioned to capitalize on improving consumer sentiment and spending. Notably, PayPal holds a “Moderate Buy” rating from Wall Street analysts, with the stock trading near its mean price target.
In this article, we will explore whether PayPal’s recent moves, including its partnership with Amazon Prime and other growth initiatives, make it a compelling buy at current levels. We’ll also dive into the company’s financials, valuation, and sentiment in the options market.
Is now the time to invest in PayPal? Let’s find out.
About PayPal Stock
PayPal Holdings, Inc. (PYPL), based in California, is a leading digital payments and fintech company, providing a broad array of innovative solutions for online transactions and money transfers. With a market cap of $80.9 billion, PayPal stands out as a significant force in the fintech sector, recognized for its comprehensive array of digital payment platforms that offer secure, convenient, and accessible financial services to individuals and businesses globally.
Year-to-date, shares of PayPal Holdings have risen 26%, slightly outperforming the S&P 500 Index's ($SPX) gain of about 20% over the same time frame.
PYPL Forms ‘Buy With Prime’ Partnership With Amazon
On Sep. 18, PayPal Holdings formed a new partnership with Amazon’s Buy with Prime, as part of CEO Alex Chriss’s strategy to expedite growth for the payment app. For brands that incorporate the Buy with Prime API, PayPal becomes available at checkout once shoppers log into their Amazon account.
Beginning next year, Prime members will have the option to link their Amazon account to their PayPal account, enabling Prime free shipping benefits to automatically apply when they use PayPal on participating merchants’ websites through Buy with Prime.
Wall Street analysts generally responded positively to this partnership. Keefe Bruyette analyst Sanjay Sakhrani noted that although PayPal’s partnership opens up a new avenue for distribution and growth, it is not expected to be “needle-moving” in the near term. The firm described the partnership as “incremental” and maintained an “Outperform” rating on PayPal with a $78 price target.
Also, Goldman Sachs stated that the partnership is an “incremental positive,” as it allows PayPal to maintain market share among direct-to-consumer (DTC) merchants. The firm also noted that this could encourage Amazon Prime shoppers to adopt PayPal as their preferred payment method. Goldman Sachs kept a “Neutral” rating and a $69 price target on the stock.
In addition, Morgan Stanley analyst James Faucette observed that Buy With Prime availability is quite limited and described the update as “directionally positive.” However, he added that partnerships aimed at enhancing product availability are not expected to be “as needle-moving as many investors anticipate over the next 12-24 months.” Morgan Stanley maintained an “Equal Weight” rating and a $71 price target on PayPal shares.
More Key Partnerships for PYPL Stock
On Sept. 9, PayPal announced an expansion of its global strategic partnership with Shopify (SHOP) in the U.S. Through PayPal Complete Payments, PayPal will serve as an additional online credit and debit card processor for Shopify Payments. With a brand-new experience, PayPal wallet transactions in the U.S. will be integrated into Shopify Payments, streamlining the management of orders, payouts, reporting, and chargeback flows. This enhancement provides a single, unified experience for PayPal and Shopify merchants, offering both innovative payment options and operational efficiency. By tapping into Shopify’s extensive merchant network, PayPal could increase its revenue and transaction volumes through fees and associated services. Also, the partnership will give PayPal an advantage in offering its other services to an expanding pool of merchants.
On Aug. 29, PayPal disclosed an expansion of its global strategic partnership with Fiserv (FI), which will simplify the process by which Fiserv’s merchant clients offer PayPal experiences to their customers. Enhancing a well-established partnership that encompasses various products and services and millions of businesses, the expanded relationship streamlines how Fiserv clients enable PayPal, Venmo, and related services. It also offers these businesses a straightforward connection to Fastlane by PayPal to expedite guest checkout flows in the U.S. It's important to note that such collaborations hold significant long-term potential to boost PYPL’s market share.
How Did PayPal Perform in Q2?
On July 30, PayPal shares climbed over +8% after the company reported stronger-than-expected Q2 results, raised its full-year earnings guidance, and lifted its share repurchase outlook.
PayPal’s net revenues grew 8.2% year-over-year to $7.9 billion, topping Wall Street’s estimates by $80 million. Revenue growth was primarily fueled by a 9% year-over-year rise (on a spot basis) in transaction revenues, largely due to increases in Total Payment Volume (TPV) and the number of payment transactions from Braintree products and services, with additional contributions from growth in core PayPal and Venmo products and services.
In terms of profitability, PayPal achieved an impressive 8% year-over-year increase in transaction margin dollars, rising to $3.6 billion, propelled by stronger-than-anticipated results from Braintree and consistent contributions from branded checkout and Venmo. This marks PayPal’s strongest transaction margin dollar performance since 2021. The operating profit margin rose to 18.5%, exceeding its own guidance and the Street’s estimate of 16.8%. Q2 adjusted EPS arrived at $1.19, beating analysts’ expectations by $0.20.
The company’s TPV grew 11% year-over-year to $416.8 billion in the second quarter, measured on both a spot and currency-neutral basis. This growth is uniformly spread across domestic and international markets, as both U.S. and international TPV increase concurrently, highlighting PYPL’s expanding market share and the escalating adoption of its payment solutions.
PayPal ended the quarter with 429 million total active accounts and 222 million monthly active accounts. The addition of about 2 million total active accounts from the first quarter highlights the company’s ongoing efforts in customer acquisition and its expanding presence in the market. In addition, the number of transactions per active account displayed a positive trend, with a trailing 12-month figure reaching 60.9, an increase of 11% year-over-year.
For Q3, management anticipates revenue growth in the mid-single digits and an increase in adjusted EPS in the high single digits.
For fiscal 2024, PayPal increased its adjusted EPS growth forecast to the low to mid-teens from the previously projected mid-to-high single digits, buoyed by sustained growth in transaction margin dollars.
It’s also worth noting that PYPL repurchased around $1.5 billion worth of shares during the quarter. Also, the company raised its 2024 share repurchase outlook to $6 billion, an increase from the previous guidance of at least $5 billion.
Is PYPL Stock Overvalued?
Analysts tracking the company forecast a 16.93% year-over-year rise in its profit to $4.42 per share for fiscal 2024, accompanied by an anticipated 7.23% increase in revenue to $31.92 billion.
Assessing PYPL’s valuation, the stock is currently trading at 17.75 times next year’s earnings estimates, well below its five-year average of 31.28x. PayPal is also trading at a discount compared to its larger fintech peers, with Visa (V) and Mastercard (MA) priced at 27.51x and 34.04x forward earnings, respectively. Block (SQ), considered to be PayPal's closest competitor, is currently trading at 18.97x forward earnings, representing a slight premium to PayPal.
The stock also seems undervalued on a forward EV/EBITDA basis. PayPal is trading at 12.19x, slightly higher than the sector median of 10.36x, but significantly below its five-year average of 22.29x.
Options Market Sentiment on PayPal Stock
Looking at the option chain for October 18, 2024, the $77.50 CALL option has a bid/ask spread of $2.21/$2.27, and the $77.50 PUT option shows a spread of $2.11/$2.15 Keep in mind that this options strike is closest to the current stock price. We can determine the anticipated price fluctuation by utilizing the midpoint prices of these options:
2.13 (77.50 put) + 2.24 (77.50 call) = 4.37/77.36 = 5.6%
Based on current prices and employing the long straddle strategy, the options market indicates that PYPL stock could experience a movement of approximately 6% by the October options expiration from the $77.50 strike price. That would place the stock in a trading range of about $72.72 to $82.00.
Notably, at the $77.50 strike price, there are about eight times as many open calls as open puts, with 7,042 open calls compared to 850 open puts. This reflects a strong bullish sentiment in the options market and implies a high likelihood of the stock increasing in value.
What Do Analysts Expect For PYPL Stock?
On Sept. 23, Deutsche Bank raised its price target on PYPL stock to $94 from $74 and kept a “Buy” rating. A Deutsche Bank analyst informed investors in a research note that after several quarters of enhancements throughout the business, particularly in the crucial metric of normalized net transaction revenue growth, the strategic priorities of PayPal CEO Alex Chriss are beginning to demonstrate early signs of success. The firm believes the company “has multiple avenues” for enhancing take rates and profitability through its unbranded business, introducing beneficial new revenue streams via Fastlane, and actively working to boost Branded growth rates.
Overall, analysts have deemed PayPal stock a “Moderate Buy.” Out of the 41 analysts offering recommendations, 16 recommend a “Strong Buy,” two suggest a “Moderate Buy,” 22 advise a “Hold,” and one maintains a “Strong Sell” rating. Notably, PYPL stock trades roughly in line with its mean price target of $78.20, but the Street-high target price of $125.00 suggests an upside potential of about 62%.
The Bottom Line on PYPL Stock
Putting it all together, I believe PYPL stock appears attractive at current levels. When it comes to Amazon’s partnership, while I don’t anticipate an immediate financial impact on PYPL’s results, the company will certainly benefit from it in the long term, along with other partnerships, through market share gains. Also, the company’s Q2 results were robust, showcasing improvements across multiple financial and operational metrics. In addition, PYPL’s valuation looks very appealing. Finally, sentiment in the options market bolsters the overall bullish outlook for the company.
On the date of publication, Oleksandr Pylypenko did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
