Down 40%, This Top Growth Stock Trades at a Bargain Basement …

PayPal (PYPL 2.08%) has gotten pummeled over the past year. Shares of the payments giant have plunged around 40% because of slowing growth and higher interest rates. Despite those issues, the company expects to continue growing this year.

Shares now trade at a very cheap valuation. Here’s a closer look into the financial technology company’s value proposition.

Growth on sale

PayPal has been growing rapidly over the last several years:

A slide showing the growth of PayPal's key performance metrics over the last several yeras.

Image source: PayPal Investor Relations Presentation. However, the company hit a speed bump last year.

Revenue rose only 8% because of foreign exchange headwinds and slowing active account and total payments volume growth of 2% and 9%, respectively. Meanwhile, non-GAAP earnings per share fell 10%, primarily because of a big benefit from a credit loss reserve release in the prior year. The company is investing to reinvigorate top-line growth, including expanding its Buy Now Pay Later offering, PayPal Rewards, and Venmo.

Meanwhile, cost savings and other initiatives should reaccelerate earnings growth. The company expects its non-GAAP earnings to jump 18% this year to around £4.87 per share. With the stock recently around £74 a share following its 40% plunge, it trades at about 15 times forward earnings.

That’s cheap compared to the broader market. The S&P 500 Index currently fetches 17.5 times forward earnings, while the Nasdaq Composite Index trades at 24 times its forward earnings.

A cash flow machine

PayPal also generates an enormous amount of free cash flow. Last year, the payments behemoth produced £5.1 billion of free cash flow, converting £0.19 of every dollar of revenue into free cash.

Despite all the economic and tax headwinds, PayPal expects to produce around £5 billion of free cash this year. Given its steep stock slide, PayPal currently has a market capitalization of £83.4 billion. As such, it trades at about 16.7 times free cash flow or a 6% free cash flow yield.

That’s dirt cheap compared to the broader market. The S&P 500 Index trades at about 20 times free cash flow (a 5% free cash flow yield), while the Nasdaq Composite Index sells for 25 times free cash flow (a 4% free cash flow yield).  PayPal produces more cash than it needs to grow the business.

It’s using the bulk of the free cash flow to repurchase its dirt-cheap stock. The payments giant repurchased £4.2 billion of its shares last year, using about 82% of its free cash flow. PayPal’s share repurchases stand out in the tech sector.

Many buybacks barely offset the dilution from stock-based compensation. However, PayPal’s repurchases reduced its outstanding shares by about 2.5% last year. Meanwhile, they’re down 7.5% from the high since it became an independent public company in 2015.

The company plans to use about 75% of its 2023 free cash flow on share repurchases, which should continue reducing its outstanding shares, especially given the lower share price. 

An industry leader at a bargain price

While PayPal is facing some headwinds, the company is making the necessary investments and changes to recharge its growth engine. Meanwhile, with shares down sharply on those growth concerns, the company trades at a bargain-basement valuation these days. Now looks like a great time to go bargain shopping and pick up shares of the payments leader while they’re on sale.

  Matthew DiLallo has positions in PayPal and has the following options: short June 2023 £67.50 puts on PayPal. The Motley Fool has positions in and recommends PayPal.

The Motley Fool has a disclosure policy.

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