Experiencing a 42% surge within six months, is PayPal a shrewd investment choice for 2025 and the years following?
Experiencing a 42% surge within six months, is PayPal a shrewd investment choice for 2025 and the years following?
After a challenging first half of 2024 with a 6% drop in shares, PayPal (PYPL 0.40%) has been turning heads, capturing investor interest remarkably. The digital finance stock has skyrocketed 42% in the past six months, boosting its year-to-date gain to 39% (as of Dec. 18), outpacing the broader S&P 500.
However, shares are still trading at a disturbing 72% below their peak price. Considering the long-term, potential investors might want to consider venturing into PayPal. Is it a smart purchase for 2025 and beyond?
Improving investor optimism
The positive trend for PayPal shares began when the company released its second-quarter financial results for 2024 (ending on June 30). During this quarter, the company displayed double-digit growth in total payment volume (TPV), driven by cost management and a broadening operating margin. Moreover, management increased their full-year profit forecast.
However, the company reported revenue figures lower than expected for the third quarter, followed by fourth-quarter guidance that fell short of market expectations. Consequently, the stock tumbled 7% upon hearing this news on Oct. 29.
But the investment community seems to have overlooked PayPal's mixed recent performance, continuing to fuel the stock's upward trend. The improvement in market sentiment has been key to PayPal's gains.
The stock has climbed 42% in the past six months. Major drivers for this increase include a 35% jump in the price-to-earnings (P/E) ratio during that period. Whether it's PayPal's solid financial performance, improving market conditions, or the potential easing of regulations, investors have become more hopeful about the company.
PayPal's resilience
Investors not swayed by the stock's turbulent history will find PayPal's business in strong shape. The company continues to demonstrate stability in key metrics, demonstrating the strength of its operations.
TPV grew 9% annually to $422.6 billion in Q3. This figure was 136% higher than in Q3 2019 before the pandemic. PayPal has undoubtedly benefited from the popularity of online shopping during the health crisis, but it has also capitalized on these gains.
CEO Alex Chriss has been particularly dedicated to streamlining the organization. Operating expenses rose by 3% in Q3, but this was well below the 6% growth of net revenue, thanks to cost-saving measures that haven't hindered PayPal's investment in marketing and product development.
The results are reflecting in PayPal's profitability. After generating $4.2 billion in free cash flow in 2023, executives forecast $6 billion in 2024. This remains a financially sound enterprise, with $16.2 billion in cash, cash equivalents, and investments on its balance sheet, compared to its $12.4 billion in debt.
Focus on the long term
With such a significant increase in the stock price in just six months, investors may be questioning if it's too late to join the PayPal surge. But I strongly suggest considering the next five years with a long-term mentality.
As of now, shares trade at a P/E ratio of 20.5. This is less than half of PayPal's historical average multiple of nearly 45, and less expensive than the broader S&P 500. Although it's not as appealing as it was earlier in the year, I still believe the current valuation is reasonable.
The opportunity for steady revenue and earnings growth, coupled with the possibility that the valuation will continue to expand, means that shareholders buying PayPal stock have the potential to be rewarded in 2025 and beyond.
Investors are considering venture into PayPal due to its impressive year-to-date gain of 39%, outperforming the S&P 500, despite shares trading 72% below their peak price. This optimism can be attributed to PayPal's strong financial performance, such as its double-digit growth in TPV, cost management, and a broadening operating margin, which boosted the company's profit forecast.
Investors have become more hopeful about PayPal due to a 35% increase in its P/E ratio in the past six months, reflecting improved market conditions and potential easing of regulations. Despite the stock's turbulent history, PayPal's resilience is evident in its strong operations, TPV growth, and solid profitability, making it a financially sound enterprise with a reasonable current valuation.