The S&P 500 might be trading 7% below the record high it touched in February, but investors are still concerned about high stock valuations. This makes perfect sense in the wake of the index’s strong gains in 2023 and 2024. Across those two years, it rose by about 53%.
But all hope isn’t lost for those still trying to find some reasonably valued equities to add to their portfolios. For those willing to look at beaten-down companies, there might still be lucrative opportunities to allocate capital with a long-term mindset.
As of March 25, one fintech stock was trading 77% off the peak it reached in July 2021, when COVID-19 was still a global health crisis. While the market’s enthusiasm for this company has fallen, the fundamentals of the business could justify more optimism.
Is this stock ready to go on a bull run?
On Feb. 4, PayPal (NASDAQ: PYPL) reported its fourth-quarter financial results. The figures didn’t do much to excite investors, and propelled the stock downward this year.
The business generated $8.4 billion in revenue and $1.19 in adjusted earnings per share (EPS) in Q4, both of which exceeded Wall Street’s consensus expectations. But the stock dipped 13% immediately following the release, perhaps due in part to the fact that total payment volume came in below expectations.
It’s also worth noting that PayPal’s growth in 2024 was slower than the year before. For the year, revenue was up 7% compared to the 8% growth posted in 2023. Consumer spending has continued its shift back to more normalized patterns, and away from the pandemic’s intense focus on e-commerce. Consumer confidence has also been under pressure.
However, PayPal remains extremely profitable. It produced $6.8 billion in free cash flow (FCF) in the last 12 months, and management is guiding for $6.5 billion (at the midpoint) this year. The company plans to use about $6 billion of that for share repurchases.
PayPal’s financial performance might not be as impressive as it was a few years ago. However, the company possesses one of the strongest brand names in the payments industry, and consumers and merchants trust it with their money. What’s more, PayPal benefits from a robust network effect thanks to its two-sided ecosystem.
These competitive strengths provide a solid foundation for the leadership team to build upon. And management is certainly focused on charting a new strategic path for PayPal.
One of the company’s objectives is to create a commerce platform that has a bigger presence both online and offline. Becoming a better partner for merchants by improving their ability to target customers is a priority, as is offering better services and a more personalized experience to consumers.
Management is excited about PayPal’s prospects. They estimate the company’s total addressable market for revenue to be over $1.1 trillion ($125 billion in online payments, $200 billion in offline payments, and $800 billion in ads, commerce, and credit). And they’ve set a long-term goal of putting up adjusted EPS growth of 20% annually.
When a stock is trading down 77% from its all-time high, it’s natural to be concerned about the outlook for the business. But in PayPal’s case, the declines have left its valuation at a bargain level. PayPal shares now trade at a forward P/E ratio of 14.1. That’s a 33% discount to the forward P/E of the S&P 500.
Investors might be worried that slower growth will be the new normal for PayPal, particularly given the competitive landscape in the fintech and payments arena. PayPal has a strong brand and it enjoys a healthy network effect, but it’s up against some well-established players on both the consumer and merchant sides of the equation. It won’t be a walk in the park for it to achieve top-line gains in the years ahead.
However, PayPal deserves credit for the position it occupies in the payments industry. And management’s strategic priorities, as well as its financial targets, should instill some confidence in investors.
The possibility of improving fundamentals, coupled with upside potential thanks to its discounted valuation, stacks the odds in favor of PayPal producing adequate returns over the next five years. While it’s difficult to predict if the stock will go on a bull run in the near term, the setup for long-term buy-and-hold shareholders looks promising.
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*Stock Advisor returns as of March 24, 2025
Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends PayPal. The Motley Fool recommends the following options: long January 2027 $42.50 calls on PayPal and short March 2025 $85 calls on PayPal. The Motley Fool has a disclosure policy.
Is This Bargain Stock Poised for a Bull Run? was originally published by The Motley Fool
