Does PayPal's share price signal an undervalued tech giant?

PayPal’s [PPYL] share price has seen more selling than buying recently. Over the past six months the stock has dropped over 36% (as of 12 January). A steep fall for a major tech stock.

Shareholders might be wondering if the online payment provider’s stock is capable of significant growth in 2022. However, a recent analyst upgrade, a series of acquisitions and strong fundamentals could see PayPal’s share price bounce back in 2022.

Why is PayPal’s share price down?

PayPal’s share price is down almost 21% over a 12 month period. Back in the middle of July, the stock was trading north of $300, yet fast forward to Tuesday’s close and PayPal’s share price closed at $191.52.

Weighing on PayPal’s share price are mixed third quarter earnings. In the quarter PayPal announced adjusted earnings of $1.11 a share on revenue of $6.18bn. Net revenue grew 13% year-on-year to $6.18bn, while total payment volume increased 24% to $310bn.

However, guidance for the fourth quarter missed expectations and the full year outlook was revised down. The payment provider now expects revenue to grow around 18% in 2021, to come in between $25.3bn and $25.4bn.

What are the growth drivers for PayPal’s share price?

BMO Capital’s James Fotheringham reckons “payment technology stocks are set up constructively” for 2022. The analyst upped his price target on PayPal’s share price from $224 to $278 at the start of January, rating the stock as Outperform.

“We believe PYPL faces uncertainty regarding the impact of competition, macroeconomic trends, and business mix on growth and margins; however, our growth-margin sensitivity analysis implies valuation risks are now skewed to the upside,” Fotheringham wrote in a note to investors.

Over on The Motley Fool, Matthew Frankel writes that the PayPal selloff might be overdone. Sure the easing of lockdown restrictions means people are shopping in physical shops and less online, but in the third quarter PayPal still processed $1.2trn in payment volume - a 26% year-on-year increase.

Frankel also notes that revenue growth was up in the quarter. Excluding money coming in from eBay, free cash flow was around $5bn annually and adjusted earnings have been enjoying double digit gains.

Will Venmo be a significant growth driver?

Venmo could be the most significant tailwind for PayPal’s share price this year. Payment volume on the app surged 36% in the third quarter to $60bn. The service began supporting cryptocurrencies in July last year and customers can even automatically purchase cryptocurrency from their Venmo account using cash back earned from their card purchases. With an existing network of 33m retailers, Venmo could help PayPal rival specialist firms like Coinbase [COIN].

Perhaps the most significant development is that Venmo users in the US will be able to use the service to pay for goods on Amazon.

“This is obviously a very significant moment in our Venmo monetization efforts,” PayPal CEO Dan Schulman said on the earnings call after the report. It “marks the beginning of an exciting journey with Amazon, now that we’re no longer constrained by the contractual obligations of the eBay operating agreement.”

The company also completed its acquisition of Paisley - a Japanese buy now, pay later solution for $2.7bn. Japan is the third biggest ecommerce market in the world and the move helps position PayPal as an alternative to credit cards as a deferred payment option in the country.

Where next for PayPal’s share price?

In his piece Frankel notes that the cashless payment market is expected to have a $45trn annualised volume worldwide. When things like cross-border money transfers are factored in, then Frankel reckons there’s around “$185trn flowing around the world each year”.

“To put it mildly, PayPal could still multiply its volume several times and still have a relatively small market share.”

The Asian Investor, writing on Seeking Alpha, has a similar argument, suggesting that PayPal’s merchant base could grow to between 50m and 60m by 2005, generating revenues of over $50bn. PayPal itself is expecting active accounts to hit 750m by 2025, an annual CAGR of 15%, with total payment volume up to $2.8trn, a 25% CAGR. Over this stretch the Asian Investor calculates that PayPal’s annual free cash flow could hit $10bn.

“PayPal's sales growth is incredibly underpriced given the potential the firm has to grow TPV and its merchant network. New product roll-outs (cryptocurrencies) could be catalysts for additional growth. “

Among the analysts on Yahoo Finance, PayPal’s share price has a $270.87 price target - hitting this would see a 41% upside on Tuesday’s close.