PayPal: Up to 16x Sales to 16x GAAP Earnings (NASDAQ:PYPL)

In our recent article on PayPal Holdings Inc. (Nasdaq: PYPL), we gave the tired bulls some good news and some bad news.

The good news is that PYPL has a respectable rating. 4.3% adjusted free cash flow rate or 23 GAAP earnings times are actually very good valuations for What a frenzy happened in the markets in the past two years. The bad news is that it’s not low enough if you understand the history of bubbles. Bubbles ends very lightly and we’re not there yet.

If you embrace this forecast, the best way to play it is to sell the guaranteed cash out at $60 or less, after the stock takes a sharp drop. We are rating this comment for the time being. The combination of our PYPL thinking and our view of the market makes us We believe a long-term buying opportunity will emerge in late 2023.

Source: One of the best values ​​in growth

The refusal to buy the stock paid off again and PYPL headed sharply lower after what appeared to be a good quarter.

We look at the Q1-2023 numbers and tell you why we’re more bullish on returns from here but aren’t ready to buy yet.

Q1-2023

The first quarter of 2023 generated better-than-expected revenue and profits. Now, in the past six months, we’ve had no shortage of ratings downgrades from the analyst community to help prepare for the strikes. This was not the case with PYPL. Earnings estimates were relatively flat and the analyst community was not doing any favors. You can see that in the chart below. The big bump higher Came after the results.

So PYPL did one of those real wins and the numbers were also way ahead of where we thought they were going to land.

The total volume of payments increased by 10% and 12% if you cancel the forex effect.

Revenue growth, which tends to follow the above metric (although not always perfectly), also came in the same ballpark.

If you look for companies that are experiencing the same volume trends in consumer spending, it doesn’t get much better than this. Visa (V) for example showed revenue gains of 11% and payments volume growth of 10% for the quarter ended March 31, 2023 (note that it’s fiscal Q2). The stock of visas has increased in part since then.

PYPL performed well here relative to what anyone would have expected, linking revenue growth with lower non-transaction expenses.

The margin expansion once again proved the bears wrong and PYPL is leveraging its business nicely at this point in the cycle.

If there was a small piece of bear fodder, it came from the total active accounts. There was a slight decrease to 433 million from 435 million.

One could argue that this was more than offset by a per-account transaction growth of 13%. But this is the difference between uphill running and downhill running. During the former, the slightest positive news is embraced to blow more air into a bubble. If there is news of PYPL expanding into Moldova, investors will be happy to add that country’s GDP equal to the market cap of PYPL. Why not, right? During the latter, you can do everything right and still be punished mercilessly. This was the key piece that caused many analysts to start lowering their Buy ratings. It seems silly and inconsequential, but a stock that they felt was a buy at $300 is now a sell at $60, even though every valuation metric has improved by leaps and bounds.

prospects

If you were expecting to find the impact of analyst cuts in earnings, you’re out of luck. Earnings are expected to rise at a strong double-digit rate for 2024 and 2025

In fact, it’s rare to see so many “further revisions” of earnings along with tank stock.

So if you want to say that doesn’t make any sense, we’re right there for you. If there is a weak point in the PYPL thesis, we really should stop discussing silly non-GAAP numbers. The 12 times earnings that people are referring to comes from adjusted earnings estimates. Still, GAAP numbers are pretty weak by comparison. PYPL is still trading in GAAP numbers of 18X.

The bulk of this GAAP-to-non-GAAP differential comes from inventory-based compensation. You can see nearly $400 million in quarterly expenses for that number in the not-so-flashy slides at the end of PYPL’s presentation.

These trends close to $1.5 billion annually and then PYPL turns around and uses “free cash flow” to buy back the same shares. So that’s the main problem posed by and those on the fence (like us) with the PYPL model.

Heck, they even admit it here if you look closely at the slide above. PYPL has spent $18 billion on share buybacks since the split. The total number of shares was basically flat between 2018 and the end of 2022 for PYPL. The number of shares did not begin to decline until after 2022.

So that period between 2018 and 2022 was the very bad capital allocation time frame where PYPL bought back its bloated shares to offset the stock-based compensation. Only when the price fell enough relative to its free cash flow did PYPL begin to make a dent in its shares outstanding.

to rule

We wish we could tell you can go on here but the evaluation still takes a lot. Yes you have growth but without new accounts coming in you should probably start tracking nominal GDP for revenue growth. We wouldn’t put 18 times GAAP earnings into a cheap category for such a stock. We certainly wouldn’t put it cheap when we think a recession is imminent. We previously used this header without including “GAAP”.

Of course, since then, inflation has proven more stable and interest rates have trended much higher. In such an environment, we would look for at least 16 times GAAP earnings as a buying point. Here we are close to a significant bottom and that should reward patient buyers. If we had to pick a play here, it would target the $55 on guaranteed cash strikes with a long history.

The margin of safety is acceptable and provides a stable income for waiting.

Please note that this is not financial advice. It may seem so, it seems so, but surprisingly it is not. Investors are expected to perform due diligence and consult with a professional who knows their goals and limitations.