After a miserable post-pandemic performance, a small number of stock pickers are finally turning bullish on PayPal (NASDAQ: PYPL). Michael Burry (of Big Short fame) is one of them. And priced at less than 10 times this year’s expected per-share profits of $5.31 in the shadow of the company’s first-quarter revenue improvement of 7%, this interest is understandable. New CEO Enrique Lores may well be leading a turnaround that’s not yet priced in.
An honest look at where this online payments company and its stock are likely to be five years from now, however, isn’t particularly exciting.
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A turnaround can only do so much
Something is clearly changing for the better with PayPal. Although the company’s earnings guidance for the year now underway suggests profits are poised to slump just a small bit, analysts are looking for more slow, single-digit top-line growth for this year and next, when earnings are expected to begin growing again. While PayPal is already established in markets like online checkout, consumer financial services (such as Venmo), and traditional brick-and-mortar payment acceptance, which Lores touts as target points for a turnaround, he at least seems to have some fresh ideas about how the company can further penetrate these businesses by leveraging its current size and brand name.
There’s a reason, however, the analyst community still only considers this ticker a hold, with a consensus price target of $49.87 that’s only about 10% above the stock’s present price. That is, there’s no real barrier to entry into any of the businesses PayPal is in. Indeed, many of the platforms that are chipping away at PayPal’s dominance — like Apple‘s Apple Pay and Block‘s Cash App — are already well positioned in many consumers’ minds. Projections from credit card outfit Capital One suggest Apple Pay’s user base is poised to grow from 65.6 million to more than 84 million between last year and 2030, for instance, outpacing any user growth PayPal has experienced of late, or is likely to muster in the foreseeable future.
Not enough reward to justify what’s admittedly modest risk
Don’t misread the message. Morningstar‘s long-term forecast suggests PayPal’s annual revenue is on pace to grow from last year’s $33.2 billion to $41.1 billion by 2030. That’s not horrible. It’s annualized revenue growth of a little over 4%. Earnings are expected to grow at about the same pace.
