It's been a great afternoon session for PayPal investors, who saw their shares rise 2.7% to a price of $63.2 per share. At these higher prices, is the company still fairly valued? If you are thinking about investing, make sure to check the company's fundamentals before making a decision.
PayPal's Valuation Is in Line With Its Sector Averages:
PayPal Holdings, Inc. operates a technology platform that enables digital payments on behalf of merchants and consumers worldwide. The company belongs to the Consumer Discretionary sector, which has an average price to earnings (P/E) ratio of 22.33 and an average price to book (P/B) ratio of 3.12. In contrast, PayPal has a trailing 12 month P/E ratio of 27.2 and a P/B ratio of 3.54.
When we dividePayPal's P/E ratio by its expected five-year EPS growth rate, we obtain a PEG ratio of 0.72, which indicates that the market is undervaluing the company's projected growth (a PEG ratio of 1 indicates a fairly valued company). Your analysis of the stock shouldn't end here. Rather, a good PEG ratio should alert you that it may be worthwhile to take a closer look at the stock.
EPS Trend Sustained Primarily by Reducing the Number of Shares Outstanding:
| 2019-12-31 | 2020-12-31 | 2021-12-31 | 2022-12-31 | |
|---|---|---|---|---|
| Revenue (MM) | $17,772 | $21,454 | $25,371 | $27,518 |
| Operating Margins | 15.7% | 16.0% | 17.0% | 14.7% |
| Net Margins | 13.84% | 19.59% | 16.43% | 8.79% |
| Net Income (MM) | $2,459 | $4,202 | $4,169 | $2,419 |
| Net Interest Expense (MM) | $82 | -$121 | -$175 | -$130 |
| Depreciation & Amort. (MM) | -$912 | -$1,189 | -$1,265 | -$1,317 |
| Earnings Per Share | $2.07 | $3.54 | $3.52 | $2.32 |
| EPS Growth | n/a | 71.01% | -0.56% | -34.09% |
| Diluted Shares (MM) | 1,188 | 1,187 | 1,186 | 1,116 |
| Free Cash Flow (MM) | $3,857 | $4,988 | $5,432 | $5,107 |
| Capital Expenditures (MM) | -$704 | -$866 | -$908 | -$706 |
| Net Current Assets (MM) | $4,091 | $679 | -$1,502 | -$926 |
| Current Ratio | 1.43 | 1.33 | 1.22 | 1.28 |
| Long Term Debt (MM) | $4,965 | $8,939 | $8,049 | $10,417 |
| Net Debt / EBITDA | n/a | n/a | 0.7 | n/a |
PayPal has growing revenues and a flat capital expenditure trend and strong margins with a stable trend. Additionally, the company's financial statements display a steady stream of strong cash flows and low leverage. However, the firm has EPS growth achieved by reducing the number of outstanding shares. Finally, we note that PayPal has just enough current assets to cover current liabilities.
