Is PayPal Stock Worth Investing In? Almost. But Here Is Why I Haven't Bought, Yet

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I first warned investors about PayPal’s (NASDAQ:PYPL) overvaluation in a YouTube video published February 6th, 2021. In that video I suggested owners of PayPal stock take profits. Here are the returns of the stock since then compared to the S&P 500:

Data by YCharts

About six months ago, I noted the PayPal YouTube video warning in a Seeking Alpha article, and there were some questions about the authenticity of my claim, so in this article I linked to the original video from February 2021 for easy access. It might be very useful for investors to watch so they can see how I go about determining whether something is overvalued or not, and when to take profits, thereby avoiding some of the really horrible drawdowns as we’ve seen recently with PayPal.

While I had determined that PayPal was overvalued, I don’t think I ever really expected it to drop as far as it has. I wrote my first Seeking Alpha PayPal article on December 13th 2021, “PayPal’s Recent Price Decline Will Eventually Happen To Nearly All Overvalued Technology Stocks“.

I think PayPal’s 2021 decline is an interesting and useful case study that goes beyond PayPal itself. The sort of decline we’ve seen in PayPal’s stock price this year was entirely predictable and there are many other richly valued technology stocks that will experience a similar decline, likely in 2022 for most of them. For investors who are overweight these types of stocks, now is probably a time to consider diversifying in order to help keep the gains they have experienced the past couple of years. While there will be some overvalued stocks that simply stagnate for several years and go nowhere, and a rare few that manage to keep rising, the vast majority will experience declines like PayPal has experienced.

My preference as a writer is to avoid writing a lot of macro strategy articles because they tend to be extremely vague and often not very actionable for readers. Instead I like to select individual stocks, perform an actual valuation analysis on them, and then, when possible, show that the pattern is more widely applicable than just that particular stock. So, with my December PayPal article, I wanted to both warn investors who owned tech stocks of the danger that was coming, but I also wanted to share the price at which I would consider buying PayPal. I think my broad warning of high priced tech stocks in December was spot on:

Data by YCharts

The returns of Invesco’s tech heavy (QQQ) ETF and ARK Innovation ETF (ARKK) have been crushed since then.

But the aspect of that article that I feel the need to update is the fair value range and the price at which I was considering buying PayPal.

First, I’ll start with my buy price and fair value range using the same assumptions and inputs I used in this article. If we use all of those same inputs my current fair value range for PayPal is about $126.50 to $164.00 per share. My current buy price that includes a margin of safety is $112.10. Investors who buy below that price have very good odds of great returns over the medium-term with the stock.

I noted in the article that if 2022’s expectations where maintained, these ranges and the buy price would likely rise as well. Obviously, we are looking at a very different outlook now, so it makes sense to update my analysis to see where we currently stand. In addition to my standard analysis, I will share some additional factors and methods I’m currently using to decide when to get into the stock, given changes in outlook both for PayPal and the macro environment, both of which have dramatically changed since December.

I’m going to first start with my standard full cycle earnings analysis, and then make the adjustments I think are warranted after that.

PayPal Full-Cycle Earnings Analysis

As part of the analysis, I calculate what I consider to be the two main drivers of future total returns: Market sentiment returns and business returns. I then combine those expected returns together in the form of a 10-year CAGR expectation and use that to value the stock.

Before I begin this analysis, I always check the business’s long-term earnings patterns in order to ensure that the business is a proper fit for this sort of analysis. If the historical earnings 1) don’t have a long enough history 2) are erratic in nature, or 3) are too cyclical, then I either avoid analyzing the stock altogether or I use a different type of analysis that is more appropriate.

FAST Graphs

First, I need to point out that PayPal doesn’t have a history as an individual stock in which it experienced a true recession as we had in 2008 and 2009. Typically, I require that in order to consider buying a stock using this method of analysis. However, as I noted in my original December article, because PayPal was part of eBay at that time and eBay performed okay during that recession, I made an exception for PayPal.

One important question to ask, though, is that while we did have a brief recession in 2020, it was a very unusual one. It’s possible that PayPal’s business could be more economically sensitive during a longer, more drawn-out recession. So, that is a risk. However, when I examined how eBay (EBAY) performed in the 2008/9 recession, its earnings growth was basically flat, and never went negative. If I had to make a guess, I think PayPal’s earnings growth rate would probably decline during a “normal” recession, but still wouldn’t be especially cyclical. For those reasons, I’m going to go ahead with my Full-Cycle Earnings Analysis even though we don’t have hard historical data from “normal” recession for PayPal.

Now we are seeing some of that economic sensitivity I expected would probably occur, but didn’t adjust for that in my original analysis even though I noted it in the article.

Analysts have dramatically lowered their expectation for 2022’s earnings from $5.25 per share back in December to $3.87 per share now. Whenever we have a fast growing stock (PayPal had been growing earnings at about 23.65% since 2015) and earnings growth turns negative, it almost always means a huge sell-off in the price. I’ve written many articles warning about this dynamic this year, particularly with Apple (AAPL) and Alphabet (GOOGL), back in February, which haven’t really fallen much yet, still, compared to what I expect.

Now that we have more realistic earnings expectations for PayPal, I’m going to run the same analysis based on those, and I will also lower my earnings growth assumption (as we will see in a moment).

Market Sentiment Return Expectations

In order to estimate what sort of returns we might expect over the next 10 years, let’s begin by examining what return we could expect 10 years from now if the P/E multiple were to revert to its mean from the previous economic cycle. Since we have had a recent recession (albeit an unusual one) I’m starting this cycle in fiscal year 2015 and running it through 2022’s estimates.

FAST Graphs

PayPal’s average P/E from 2015 to the present has been a healthy 35.49 (the blue bar circled in gold on the FAST Graph). Using 2022’s forward earnings estimates of $3.87 (also circled in gold), PayPal has a current P/E of 19.61. If that 19.61 P/E were to revert to the average P/E of 35.49 over the course of the next 10 years and everything else was held the same, PayPal’s price would rise and it would produce a 10-Year CAGR of +6.11%. That’s the annual return we can expect from sentiment mean reversion if it takes ten years to revert. If it takes less time to revert, the price could rise faster.

However, I think we are in a situation where we need to take a step back and ask ourselves if it’s realistic to think that PayPal will ever trade at a 35 P/E again (at least in the next five years or so). I think maybe it could, but I would only give it a 10% chance that both earnings will stabilize and start growing again, and that the stock also trades at a 35 P/E. With odds that low, it doesn’t make sense to me to assume this sort of mean reversion will happen. For that reason, I am currently excluding the mean reversion portion of my typical analysis and mostly relying on business earnings expectations for my valuation. (This is standard procedure for stocks I think might be going through a permanent rerating or multiple compression cycle as PayPal likely is.)

Business Earnings Expectations

In this section, we will examine the actual earnings of the business. The goal here is simple: We want to know how much money we would earn (expressed in the form of a CAGR %) over the course of 10 years if we bought the business at today’s prices and kept all of the earnings for ourselves.

There are two main components of this: the first is the earnings yield and the second is the rate at which the earnings can be expected to grow. Let’s start with the earnings yield (which is an inverted P/E ratio, so, the Earnings/Price ratio). The current earnings yield is about +5.06%. The way I like to think about this is, if I bought the company’s whole business right now for $100, I would earn $5.06 per year on my investment if earnings remained the same for the next 10 years.

The next step is to estimate the company’s earnings growth during this time period. Taking into account 2022’s earnings decline, I get an earnings growth rate of about +17.81% since 2015. Notably, analysts expect EPS to grow 22% in 2023 and 23% in 2024. For what it’s worth, I decided a while back to lower my expectation for earnings growth to 15%. That could still be a little on the high side, but I certainly think there are ways PayPal can improve and expand their business and continue to grow again. If a person wanted to slap a 10% growth rate assumption on it, I wouldn’t argue too much with them, though.

Next, I’ll apply that growth rate to current earnings, looking forward 10 years in order to get a final 10-year CAGR estimate. The way I think about this is, if I bought PayPal’s whole business for $100, it would pay me back $5.06 plus +15% growth the first year, and that amount would grow at +15% per year for 10 years after that. I want to know how much money I would have in total at the end of 10 years on my $100 investment, which I calculate to be about $218.18 (including the original $100). When I plug that growth into a CAGR calculator, that translates to a +8.11% 10-year CAGR estimate for the expected business earnings returns.

Is PYPL Stock a Buy, Sell, or Hold?

When I include the Mean Reversion factor, I typically have my buy threshold set at as 12% expected 10-year CAGR, but when I take out mean reversion all together as I am doing with PayPal, I lower that threshold to a 9% CAGR. Currently PayPal is just below that threshold at 8.11%, and the price would need to drop to about $66.00 per share in order to trigger a buy, assuming earnings expectations do not drop even more from here. And that’s the price I’m currently looking to buy the stock at right now. At its current price of around $72, that makes PayPal a “Hold” for now.

Tools for staying out of trouble on the way down

If I was reading this article, and I read that the author previously planned to buy at $112 per share and did not, but is now aiming to buy at $66, or half the original price, I would wonder how they avoided buying the stock so far. I will start by saying that even though I avoided buying PayPal on the way down, I’m not perfect in this regard. I have a few stocks that I bought using the same type of analysis, and I bought them at prices that were too high. For example, I bought Fortune Brands Home & Security (FBHS) last September and it’s down -27%. I bought Global Payments (GPN) in January and it’s down-18%, and bought Ollie’s Bargain Outlet Holdings (OLLI) last August and it’s down -40%. So, I have taken some licks, too. However, I run an unconcentrated portfolio and typically take 1% weighted positions. Most of my holdings are less than three years old and even after the current market decline only 1/4th of them are currently negative. So, not everything is always going to work out perfectly, but not putting most of one’s eggs in one basket can give a person time to make adjustments to changing conditions. Often I learn a lot fairly quickly from one or two small positions that do unexpectedly poorly, then make adjustments, which ultimately save me from repeating the mistake.

The factor that I added at some point early this year for growth stocks that were coming down pretty sharply off their highs, was I required that they be above the 50-day Simple Moving Average, as well as be below my buy price, before I bought.

Data by YCharts

Basically, from the fall of 2021 all the way until the beginning of April of this year, PayPal has been below the 50-day SMA, and since I was watching this factor since the beginning of 2021, it kept me from buying this stock too soon. When the stock eventually did briefly rise above the SMA, earnings expectations had dramatically declined and that caused my buy price for the stock to drop as well, so I still haven’t purchased the stock.

When a stock is in total free-fall, the 50-day SMA does a pretty good job at avoiding some of the worst of the declines. And it saved me some potential pain with PayPal. However, it’s not perfect, and I had three or four growth stocks I was using the same method for, that rose above the 50-day, I bought them, and then they continued to fall. So, again, I haven’t been perfect here, but for those three or four I bought, there were dozens that the factor saved me a lot of money on.

Importantly, I don’t usually use short term technical indicators like this, but it does make sense to use them sometimes in conjunction with normal valuation methods if they can help get better overall prices a little closer to a potential bottom.

Because I didn’t have a 100% success rate using the 50-day SMA factor, I did some more research to see if I could find some other simple, yet useful factor to try to help get cheaper prices as a growth stock was rerating or simply falling quickly. And I found that Seeking Alpha’s Momentum Factor actually worked pretty good in this regard, so I now use it instead of the 50-day SMA. With the Momentum factor, what I want to see is that the stock has a grade of “B-” or better (and, of course, the stock meets my other normal valuation metrics). I really only use this for fast growth stocks or “boom/bust” stocks that are going through unique declines. For the rest of the stocks I track, I just use my normal valuation methods.

Seeking Alpha

Currently PayPal has a “D” grade for momentum, so even if the stock hit my buy price, I would hold off buying until the momentum rose to a “B+” or better. If you go to the “Quant” link, you can see the full momentum score history. It’s long, so I won’t post it here, but looking through the score history you can see that PayPal fell from a “B-” to a “C+” on 9/23/21, and has never reached a “B-” score since that date. Combining my normal valuation method with the momentum score of “B-” or better, would have prevented us from buying too early. I now use this factor with all of my fast growth stocks and boom/bust stocks to help get better prices.


Achieving above average returns stock investing is pretty hard. On one hand, investors need to be really disciplined at whatever strategy it is they decide to use. On the other, when things change, investors also have to be flexible and adjust those strategies to whatever the reality happens to be. 98% of the time I don’t using any technical analysis guides when making stock purchasing decisions because I’m mostly a medium-term investor with a typical holding period of 2-5 years. I’m really not a trader. But when the markets are leading the fundamentals, and the magnitudes of change are huge, it makes sense to adjust to that situation.

There are a lot of stocks in the market that have sold off dramatically and investors can buy several of them at today’s prices and do pretty good long-term with them. PayPal is probably one of those. But I am always trying to get the very best price that I think I can reasonably get with a stock. The benefits are two-fold. First, if I’m right about my thesis, the returns will be fantastic if I buy very low. Second, if I’m wrong, I don’t stand to lose as much (most of the time) if I buy very low.

In the end, I only made a few adjustments to my approach with PayPal. I decided the odds of a full mean reversion could not be counted on, so I removed that factor. I lowered my medium-to-long-term earnings growth expectations from 20% to 15%. And I layered in a momentum indicator so that I would be more likely to at least get somewhat close to the bottom. Waiting on the momentum shift is important not because of the shift itself, but also because it gives more time for bad news about the company to come out, which could send earnings expectations down further. That’s exactly what happened over the next six months or so. While I was waiting on the price to cross the 50-day SMA, earnings expectations fell dramatically, thereby lowering my fundamentals-based buy price (basically, cutting it in half).

Whenever the price of a stock falls this much, the bears come out and tell us all the reasons the business will fail. Strangely, they don’t do it when the price is high. There was only a single “sell” article written on PayPal on Seeking Alpha in calendar year 2021, and it was in mid-December after the price was down about -50% off its highs. But, after the price falls, then all the bears tell us everything is that is going wrong. And probably some of those things will be true. Most businesses do not end up being good long-term investments, so we always want to be aware of changes that are happening to the business and the risks that go along with them.

PayPal is getting cheap enough now that I think it’s time to first listen to the bears and understand their point of view, but then to understand that probably most of that will be priced into the stock. When I do potentially buy PayPal, it’s with the understanding that I don’t know exactly what the future holds for them, but they have people working there whose job it is to fix problems and improve the business. I don’t know what the specific solution is for them to start growing again. But I do know that most of the current price decline in the stock happened simply because it was massively overvalued and that had nothing to do with the actual business. At a low enough price, I’m still willing to take a chance on this stock.