Is PayPal (PYPL) Pricing Reflect Its Potential After Prolonged Share Price Weakness?

• If you are wondering whether PayPal Holdings' current share price reflects its true worth, you are not alone. This article walks through what the numbers are actually saying about value.
• The stock last closed at US$44.90, with returns of 11.0% over the past 30 days but declines of 4.4% over 7 days, 22.8% year to date and 34.5% over the past year, and a 38.2% and 81.3% decline across the last 3 and 5 years respectively.
• Recent headlines around PayPal have focused on how the business is positioned within digital payments and how it is responding to competition and changing consumer habits. These updates have helped shape how investors think about the risk and opportunity behind those recent price moves.
• Simply Wall St currently gives PayPal a valuation score of 5 out of 6. Next we will walk through the main valuation approaches behind that score, before finishing with a different way to think about value that can tie all of these methods together.

Find out why PayPal Holdings's -34.5% return over the last year is lagging behind its peers.

Approach 1: PayPal Holdings Excess Returns Analysis

The Excess Returns model looks at how effectively a company uses shareholders' equity and compares that to the return investors require. In simple terms, it asks how much profit PayPal Holdings can generate above its cost of equity and then builds an intrinsic value from those surplus returns.

For PayPal Holdings, book value is US$22.02 per share and the stable book value used in the model is US$27.30 per share, based on estimates from 8 analysts. Stable EPS is US$6.22 per share, also sourced from those forward return on equity estimates. The average return on equity in the model is 22.80%, while the cost of equity is US$2.10 per share. This leaves an excess return of US$4.12 per share that the model treats as value created above investors' required return.

Using these inputs, the Excess Returns model arrives at an estimated intrinsic value of US$123.22 per share. Compared with the recent share price of US$44.90, this implies the stock is 63.6% undervalued based on this framework.

Result: UNDERVALUED

Our Excess Returns analysis suggests PayPal Holdings is undervalued by 63.6%. Track this in your watchlist or portfolio, or discover 48 more high quality undervalued stocks.

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for PayPal Holdings.

Approach 2: PayPal Holdings Price vs Earnings

The P/E ratio is a useful yardstick for a profitable company like PayPal Holdings because it links what you pay per share directly to the earnings the business is already generating. It gives you a quick sense of how many dollars investors are currently willing to pay for each dollar of earnings.

What counts as a "normal" P/E usually reflects a mix of growth expectations and risk. Higher expected earnings growth or lower perceived risk can justify a higher multiple, while slower growth or higher risk often aligns with a lower one.

PayPal is trading on a P/E of 7.90x. That sits well below the Diversified Financial industry average of 17.57x and the peer average of 30.80x. Simply Wall St also calculates a proprietary Fair Ratio of 15.85x for PayPal. This is the P/E level its model suggests based on factors such as earnings growth outlook, profit margins, industry, market cap and company specific risks.

The Fair Ratio can be more informative than simple peer or industry comparisons because it adjusts for the specific mix of growth, risk and profitability that is relevant to PayPal rather than assuming all companies deserve similar multiples.

With a current P/E of 7.90x versus a Fair Ratio of 15.85x, PayPal screens as trading below the level suggested by these inputs.

Result: UNDERVALUED

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Upgrade Your Decision Making: Choose your PayPal Holdings Narrative

Earlier we mentioned that there is an even better way to understand valuation. Let us introduce you to Narratives, which are simply your story about PayPal Holdings, tied directly to your own forecasts for revenue, earnings and margins on Simply Wall St's Community page. Your view of the company flows into a financial model, produces a Fair Value that you can compare with the current share price, and then updates automatically as new results or news arrive. Whether you see PayPal as a significantly undervalued cash flow machine with a Fair Value around US$189.96, or as a more cautious case closer to US$52.03, you can see how those different stories, assumptions and Fair Values line up against today's price and against each other.

Do you think there's more to the story for PayPal Holdings? Head over to our Community to see what others are saying!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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