Paypal (PYPL) May Not Be Paying-Your-Pal Right Now, But It's Not Time To Walk Away.

2 Nov 2021

PayPal shares are continuing a slump which began about two weeks ago after rumors had it that the company was in talks to acquire the social media platform Pinterest. Despite PayPal confirming early last week that it was not pursuing an acquisition of Pinterest at this time, the stock has been unable to find any bid. Effectively, the stock has erased all its year-to-date gains, as it broke down from about $270 to $230.

PayPal is a broken stock right now in terms of technical, but just because the stock is broken does not mean the company is broken (fundamental).

PayPal is expected to have a very strong year as the migration from eBay completes. Management’s guidance calls for top line growth of roughly 20%, an increase to adjusted earnings per share by roughly 21%, free cash flow generation greater than $5 billion, and an increase of 52 to 55 million net new active accounts.

We like PayPal because it is constantly improving its product to meet the needs of their customers. Back in September, the company unveiled updated PayPal App, which includes several new products like high-yield savings, early direct deposits, bill pay in-app shopping tools. The new and improved PayPal is expected to boost engagement on the platform and increase the number of active accounts. The increase in active users will help boost PayPal's income, as they recently increased merchant fees.

But there is still more to the PayPal story. PayPal recently acquired Paidy, a buy now, pay later leader in Japan to increase market share and overall capability. We have not seen what profitability this will bring, and will be looking forward to this when the company reports Q3 earnings on November 7th (although it may be too early, given the announcement was made in September). Also, there have been rumors that PayPal is interest in creating a stock-trading platform; the company itself has yet to confirm this or lay out details about how this will work. Once again, more details from this will give investors reasons to buy.

Lastly, we cannot forget how PayPal has a strong history of opportunistically buying back stock. PayPal bought back $200 million worth of stock in the second quarter of 2021, adding to what has already been a massive run of share repurchase activity. Since PayPal’s separation from eBay through the second quarter of 2021, the company has repurchased roughly 123 million shares, returning $10.1 billion in capital to shareholders at an average price of $82.26. Due to the recent decline in the share price, we believe management will be more aggressive with its repurchase activity given they are not looking at any M&A activity right now; when you buy PYPL, you have confidence that the company itself is buying with you.

Bottom line:

So what do you do when you have a strong secular growth company, while the stock is declining? Buying opportunity. However, this also doesn't mean being all-in and buy every single dip. Our approach right now is to buy at incremental lower prices (for example, every 5% decline), keeping tab on the weight of the position to not let it become too much of a drag on our portfolio.