As the economy shows signs of recovery and consumer sentiment improves, PayPal Holdings (PYPL) has surged more than 10% over the past month. As we approach August, let us closely evaluate PYPL's prospects and whether it presents a compelling investment opportunity...

Higher consumer sentiment, steady wages, lower unemployment, and controlled inflation are boosting household spending, which should benefit leading payment processor company PayPal Holdings, Inc. (PYPL). Therefore, I think PYPL stands as an appealing stock to buy before August in the current market landscape.

The U.S. consumer sentiment surged to its highest level in almost two years this month as inflation eased and the job market remained strong. The University of Michigan's preliminary reading on the Consumer Sentiment Index reached 72.6, compared to 64.4 in June and the highest since September 2021.

Moreover, due to its robust presence in the digital payment sector, PYPL is poised to capitalize on the growing trend toward cashless transactions, solidifying its position as a major player in the continuously evolving financial realm.

PYPL has soared 10.1% over the past month. However, the stock has tumbled 11.5% over the past nine months to close the last trading session at 73.69.

Here is what I think could influence PYPL’s performance in the upcoming months:

PYPL Rolls Out Tap to Pay on Android for Venmo Businesses (U.S.)

On June 28, 2023, PYPL announced that Tap to Pay on Android is rolling out for Venmo business profile users in the U.S., enabling them to accept contactless payments directly on their Android mobile devices with no additional hardware or upfront cost.

Multi-Year Agreement for €3 Billion Loan Commitment and BNPL Expansion

On June 20, PYPL and KKR & Co. Inc. (KKR), a leading global investment firm, announced the signing of an exclusive multi-year agreement for a €3 billion ($3.31 billion) replenishing loan commitment under which private credit funds and accounts managed by KKR will purchase up to €40 billion ($44.25 billion) of buy now, pay later (BNPL) loan receivables originated by PayPal in France, Germany, Italy, Spain, and the United Kingdom.

Gabrielle Rabinovitch, Senior Vice President, acting Chief Financial Officer of PYPL said, "Our collaboration with KKR will allow us to accelerate our PayPal Pay Later originations alongside market demand in Europe while preserving free cash flow for other strategic initiatives. This transaction is yet another example of our disciplined approach to capital allocation."

Robust Financials

During the fiscal first quarter of fiscal 2023, that ended March 31, 2023, PYPL’s non-GAAP operating margin increased by 201 bps year-over-year to 22.7%. Its non-GAAP net revenues rose 9% year-over-year to $7.04 billion and non-GAAP net income grew 28% from the year-ago quarter to $1.33 billion.

Furthermore, the company’s non-GAAP earnings per share amounted to $1.17, up 33% year-over-year.

Bright Growth Prospects

Analysts expect the company’s revenues to increase 6.9% year-over-year to $7.27 billion in the current quarter (ending September 2023). Moreover, its EPS is expected to rise 27.7% from the previous year to $1.16 in the same quarter.

Moreover, the company’s EPS and revenue are expected to rise 19.9% and 7.5% year-over-year to $4.95 and $29.58 billion, respectively, in the fiscal year 2023. Also, the company has surpassed the EPS estimates in each of the trailing four quarters, which is remarkable.

Healthy Profitability

PYPL’s trailing-12-month asset turnover ratio of 0.37x is 79.5% higher than the 0.20x industry average. The stock’s trailing-12-month CAPEX/Sales of 2.44% is 26.7% lower than the industry average of 1.93%.

In addition, its trailing-12-month ROCE, ROTC, and ROTA of 13.37%, 8.97%, and 3.50% are 18.5%, 70.4%, and 214.3% higher than the industry averages of 11.28%, 5.26%, and 1.12%.

Discounted Valuation

In terms of forward EV/Sales, PYPL is trading at 2.78x, which is 11% lower than the 3.13x industry average. The stock’s forward EV/EBITDA multiple of 10.89 is 2.6% lower than the 11.18x industry average.

POWR Ratings Reflect Bleak Prospects

PYPL has an overall rating of B, which translates to Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. It has a B grade in Growth, in sync with its robust financial performance in the recent quarter.

PYPL is ranked #12 in the 47-stock Consumer Financial Services industry.

Beyond what I have stated above, we have also given PYPL grades for Sentiment, Quality, Value, Stability, and Momentum. Get all PYPL ratings here.

Bottom Line

PYPL is expanding its services and revenue streams through a multi-year agreement with KKR, which will enable PYPL to accelerate its PayPal Pay Later originations while maintaining free cash flow for other strategic initiatives.

Moreover, with an increasing shift towards cashless transactions, PYPL's robust presence in the digital payment sector positions it as a major player in the evolving financial landscape.

Considering the improving consumer sentiments, PYPL’s recent new launches, low-valuation multiples, and high profitability, PYPL might be an ideal buy now.

How Does PayPal Holdings, Inc. (PYPL) Stack Up Against its Peers?

PYPL has an overall POWR Rating of B. One could also check out these other stocks within the Consumer Financial Services industry with an A (Strong Buy) and a B (Buy) rating: Regional Management Corp. (RM), Ezcorp Inc. CI A (EZPW), and Enova International, Inc. (ENVA).

43 Year Investment Pro Shares Top Picks

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Steve Reitmeister’s Trading Plan & Top Picks >

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PYPL shares were trading at $74.25 per share on Tuesday morning, up $0.56 (+0.76%). Year-to-date, PYPL has gained 4.25%, versus a 19.64% rise in the benchmark S&P 500 index during the same period.

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About the Author: Kritika Sarmah

Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.

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