Thesis
Following the revelation that PayPal (NASDAQ:PYPL) had released its earnings for the second quarter of 2022 on August 2nd, the stock increased by more than 10% (after market close). And justifiably so. The company set a new high mark for gross bookings and came through with forwarding guidance that was far better than anticipated.
Additionally, the firm said it would be working more closely with Elliott Management, a successful activist hedge fund. This partnership is expected to further push and support PayPal in its efforts to deliver value to shareholders.
Compared to the S&P 500’s performance over the same period, PayPal stock has lost over half of its value. Despite the recent uptick, investors interested in hopping on the PayPal bandwagon can do so at a discount.
My valuation of PayPal is based on a 20x EV/EBITDA multiple, which is consistent with GARP considerations, and as a result, I calculate a potential upside of approximately 25%. My price objective for the next year is $125 per share.
PayPal’s Q2 Results
PayPal reported a total payment volume of $340 billion and produced revenues of $6.8 billion for the quarter from April to the end of June. This represents an increase of around 9% yearly (10% FX neutral). PayPal reported a non-GAAP operating income of $1.3 billion and earnings per share of $0.93 for the quarter that ended on June 30th.
PayPal reported a non-GAAP operating income of $1.3 billion and earnings per share of $0.93 for the quarter that ended on June 30th. Both PayPal’s operating cash flow, which came in at $1.5 billion, and its free cash flow, which came in at $1.3 billion, increased by 12% and 22%, respectively, compared to the prior period.
The management team delivered above-consensus guidance, which pleasantly pleased the market. Based on a TPV of around $1.4 trillion, total sales are anticipated to be close to $27.85 billion during the fiscal year 2022. Therefore, it is anticipated that the net revenues will rise by around 10% compared to 2021. (11% FX neutral).
PayPal’s current forecast calls for GAAP earnings per share of between $1.52 and $1.62 and non-GAAP earnings per share of between $3.87 and $3.97. It is expected that there will be approximately 10 million Net New Actives (NNAs). However, the business pointed out:
“However, as with all of our forecasts, NNA growth could be affected by broader economic factors, given the channels that drive organic customer acquisition, may be negatively impacted by falling consumer sentiment and reduced demand for discretionary goods.”
At the end of the second quarter, PayPal had $15.6 billion in cash and short-term investments, significantly higher than its total debt of $10.6 billion.
Shareholder Value Will Be Freed Up As a result of Elliott’s Stake
The essential thing to note is that many intriguing cross-reads indicate the company concentrates on increasing shareholder value. PayPal has announced a share buyback program that will cost the company $15 billion over the next four years.
PayPal has announced a share buyback program that will cost the company $15 billion over the next four years. In a recent press release, PayPal revealed that the investment firm Elliott Management had acquired a $2 billion ownership holding in the company. Management indicated that PayPal had signed into an “information-sharing arrangement” with Elliott Management and acknowledged that this deal exists.
Jesse Cohn, managing partner at Elliott, gave the following account of his thoughts on the collaboration:
“As one of PayPal’s largest investors, with an approximately $2 billion investment, Elliott strongly believes in the value proposition at PayPal. (We PayPal has an unmatched and industry-leading footprint across its payments businesses and a right to win over the near and long term.”
3 Important Steps to Take
PayPal identified three significant projects, which are as follows: The first objective is to increase market share even though the management of the company believes that many of the company’s rivals are restructuring their business strategies.
The second priority is cutting the company’s cost basis as much as possible. In light of this information, management has set a goal to cut operational costs by $900 million by the end of this year and another $400 million by the end of 2023. Therefore, over the long term, investors are guaranteed savings of around $1.3 billion in annual costs. In addition to that, the organization emphasized:
In addition to that, the organization emphasized:
Thirdly, the company’s product, engineering, and technology functions are all in need of “world-class talent,” which it plans to attract to bolster its operating model and boost the company’s overall capabilities.
Implications and Suggestions
I have a strong outlook on PayPal because I believe the stock is now trading at a discount. The market action following the release of earnings indicated that buy-side investors are interested in purchasing the company at the current risk/reward ratios. Although the stock has lost almost half its value so far this year, it has most likely reached its bottom.
At the moment, PayPal has a forward EV/EBITDA multiple of approximately 16 times for the following year. In my opinion, a ratio of 20x would be a more authentic representation of the company’s value and its potential for ongoing expansion.
As a result, I have determined that a fair implied target price of approximately $125 per share is appropriate, and I anticipate an upside of approximately 25% from the present levels.
Featured Image: Megapixl © Prykhodov
