PayPal Stock Is Up 20% in 2 Months. Here's Why the Stock Could Double From Here
These past few weeks have been a welcome change if you're a PayPal (NASDAQ: PYPL) investor. Instead of the stock moving sideways after its dramatic decline, it finally showed some life and rallied as much as 20%. The stock still has a long way to go -- it's still down 75% from its all-time highs. However, the recent rebound could be the beginning of a much larger move, and investors who missed out on the first part of the rally have the opportunity to participate in a much larger rise.
Even though the stock has had a good run, I think it can double from here. PayPal's business is strong, and the stock is still quite cheap.
PayPal's business is no longer a growth story
PayPal's business is fairly simple: It handles digital payments. This takes the shape of different platforms, whether the PayPal wallet that's used to aid in online checkouts, Venmo for peer-to-peer transactions, or unbranded payment processing that its clients use.
PayPal is a giant in this market. It processed $416 billion in total payment volume in the second quarter, up 11% year over year. This is solid growth, but it's nothing that would get growth investors excited, which is why the stock has done so poorly the past few years.
PayPal went through an identity crisis as it transitioned from a growth story to a value story quite quickly. In 2022, when the company was growing rapidly, investors had to pay a premium to own the stock. The company's pandemic-fueled growth quickly evaporated, and the stock was soon trading at a discount to many stocks in the market, at least when measured by its price-to-earnings (P/E) ratio.
During that time, PayPal hired a new chief executive officer in an attempt to revive the company. It has taken about a year, but investors are starting to see the effects of Alex Chriss's leadership.
One thing Chriss continued to do that previous leadership did was repurchase shares. It was obvious that the stock was cheap, so share buybacks were the smart thing to do. In Q2, PayPal generated free cash flow (FCF, or what's left of cash flow after capital spending) of $1.4 billion and used all of that (and then some) to repurchase $1.5 billion in shares. That's 2.25% of the entire company.
This action boosted PayPal's earnings per share (EPS) by 17% in Q2. Although management won't be getting the same deal on its shares thanks to the recent rally, share buybacks are still a smart idea when the stock is trading below the S&P 500 average of 24.2 times earnings.
In addition to the positive effects of the share buyback program, PayPal raised its 2024 outlook. Its transaction margin estimate (how much money it makes from each transaction) went from just slightly positive to low- to mid-single-digit percentage growth. Its EPS projection increased from $3.65 to a range of $3.88 to $3.98. Its also raised its FCF outlook from $5 billion to $6 billion, which also caused its share repurchase projection to rise.
This bodes well for the stock, but could it double from here?
Share buybacks will fuel future returns
The key to this analysis is that the double projection isn't going to happen overnight. It's going to be a long road, but I think the stock could easily do it in the next five years.
PayPal's revenue growth will not be impressive because it's now a mature business. However, it will be enough if it can muster a conservative 7% revenue growth for this timeframe. The key is its share buybacks. If it continues using its FCF to repurchase shares and buys back $6 billion worth of shares each year, then it will have repurchased around 40% of the shares outsanding in the next five years.
If the stock stays at today's valuation, revenue increases at a 7% pace with its current profit margin, and the company buys back 40% of it equity, its earnings per share will rise 146% from today's level. That would easily cause the stock to outperform the market and likely double.
PayPal isn't a flashy growth investment anymore, but its dedication to becoming more efficient and repurchasing shares makes it a winning investment. Don't get distracted by the latest rally -- there are still plenty of gains in store for PayPal's stock.
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Keithen Drury has positions in PayPal. The Motley Fool has positions in and recommends PayPal. The Motley Fool recommends the following options: short December 2024 $70 calls on PayPal. The Motley Fool has a disclosure policy.
PayPal Stock Is Up 20% in 2 Months. Here's Why the Stock Could Double From Here was originally published by The Motley Fool