PayPal: We See Shares as Materially Undervalued

Over the past few years, the market has vacillated between hope and despair when it comes to PayPal PYPL. The company’s stock roughly tripled in the early stages of the pandemic, but the shares have since fallen about 75% from their peak to a level materially below their prepandemic price. With market confidence in the stock at a low ebb, we see a potentially good long-term opportunity. Our fair value estimate for the narrow-moat company is $135 per share.

We think the market is overly focused on near-term absolute growth, when we believe it should be more focused on relative performance. In our view, relative performance is a better indicator of the company’s competitive position and long-term value. While we recognize the headwinds PayPal faces in the near term, in the long term the company’s fate remains tied to the high-growth e-commerce space, with Venmo providing some additional upside option value. Historically, PayPal has demonstrated it can take share in this area, and we believe the company retains a strong competitive position.

That said, we recognize that this e-commerce focus could be a double-edged sword, as competition within e-commerce is relatively intense. We believe PayPal can hold its own in the face of this competition and see no signs in the company’s recent performance to suggest its overall competitive position has weakened but recognize the potential for results to veer in either direction longer term. As a result, we see the stock as more suited for risk-tolerant investors.