Two bull cases for PayPal
Picking up where I left off in yesterday's e-mail...
In it, I analyzed PayPal's (PYPL) historical financials. As I said, they look exceptionally strong.
PayPal has high margins, growth, and free cash flow ("FCF"). The company also boasts a strong balance sheet and smart capital allocation.
But despite this, PayPal's stock has been crushed. As I said yesterday:
At [Tuesday's] closing price of $44.53, it trades at a mere 8.4 times this year's consensus earnings estimates of $5.30 per share.
That's a small fraction of the S&P 500 Index's multiple of 22 times. And it's within a whisker of PayPal's all-time low...
This is a low multiple for such a high-quality business, which has caught the eye of many smart investors.
Today, I'll share the bull case made by two of them...
One is my old friend Michael Burry of The Big Short fame.
Burry disclosed a month ago that he had recently doubled his position in PayPal to 6.6% of his portfolio, which I covered in my May 6 e-mail.
As Burry said in a Substack post (for paid subscribers only), he liked the company's May 5 earnings report:
PayPal reported decent earnings today, with 7% revenue growth. PayPal is a float business, but lower interest rates created a headwind. Venmo is growing strong double digits and remains a pawn for value realization. Active accounts are flat, and guidance of a flat 2026 could be table-setting by the new CEO.
Of the buyback program, he wrote:
The buyback is now $6 billion for the trailing twelve months on a now $41 billion market capitalization, and PayPal has essentially no net debt. That $6 billion came roaring out of free cash flow...
Very large buybacks are not a story the market respects in low growth names.
Nevertheless, as recently shown with eBay, when the valuation is compressed over a longer period of significant buybacks, the numbers play out in the share price eventually, especially with a little turnaround/refresh under new management.
Burry also said in his post that he saw opportunity for the new CEO to increase margins and profits via cost cutting:
The new CEO is looking to save $1.5 billion in run-rate expenses the next few years, and news this morning is of 20% layoffs...
PayPal does not need nearly as many people as it has to run its business, and continued deployment of foundation models will accelerate work force reductions.
In addition, someone posting under the handle "BigBrainBear" pitched the stock on my favorite stock idea website, ValueInvestorsClub (membership required), on May 25 when it was trading at $44.23...
In the post, BigBrainBear notes that the consensus view is that:
... this is a declining payments giant which will be eaten away at by new entrants, Apple Pay and Stripe in particular... The implied growth rate [in the stock] tells us that [investors think] PayPal's free cash flow will shrink on average by -9.3% over the next 10 years.
But as the pitch continues:
Let's look at the numbers. In terms of decline/deterioration, it is pretty nonexistent. The business is simply mature – that's a feature, not a bug.
To help show this point, BigBrainBear shared these three charts:
Like Burry, BigBrainBear likes PayPal's massive share-repurchase program:
They are deploying every extra dollar of FCF to buybacks – this company doesn't have to prove itself earnings by earnings, it is already viewed as a zombie. All PayPal has to do is slowly cannibalize itself and return value to shareholders. The investor can wait for a rerating, but assuming nothing changes, with this amount of cash flow, PayPal can retire ~14% of shares every year.
As BigBrainBear concludes in the pitch:
Free cash flow has been $4.2B, $6.8B, and $5.6B for the last three calendar years, compared to a market cap of less than $40B. If you believe these growth projections are even slightly off, there is significant alpha to be had here. My base case share price is $128 and my best case is $146. The assumptions for both of these cases are quite conservative. A no-growth scenario (with a basis of $5.5B TTM of FCF) produces a valuation of $100 a share.
I think Burry and BigBrainBear are right that PayPal's stock is very attractive at today's depressed price.
If my team and I decide the stock looks compelling enough to add to the Stansberry's Investment Advisory model portfolio, subscribers will be the first to know. Find out how to become one – and gain instant access to all of our current open recommendations – as part of a special presentation by clicking here.
Best regards,
Whitney
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