PayPal (NASDAQ:PYPL) released stellar results for Q1 on May 5, the strongest in company history. It also raised its guidance for 2021 from the prior quarter. This will push PYPL stock at least 23% higher to $332.79 based on my calculations.
PayPal’s revenue and earnings are highly dependent on its Total Payment Volume (TPV). This is the sum of the value of all transactions conducted on the platform. PayPal generates revenue by charging fees on those transactions. That percentage fee is known as the company’s Take Rate. Multiply the Take Rate by TPV that and you have revenue.
So it is important to watch for growth in TPV and trends in the Take Rate. I use these to estimate the company’s revenue growth. For example, if one of these factors rises but the other falls, revenue growth might be muted.
Growth and Valuation
PayPal’s take rate fell from 2.41% last year to 2.11% this past quarter, even though its TPV grew by 46% year-over-year. This can be seen by dividing its revenue this quarter of $6.03 billion by its $285 billion in TPV (i.e., 2.11%). Last year, 2.41% of every transaction ($191 billion) turned into $4.62 billion of revenue.
Despite this lower take rate, revenue still rose by 30.5%, mainly because of the high 46% growth in TPV. That is very important. It shows that the company’s revenue can withstand fee competition due to the huge growth in the volume of transactions it processes. This shows the strength of the company’s inherent earnings power.
The company provided upgraded guidance on its TPV. Now PayPal says that its TPV will be 30% higher for the year than last year. Last quarter the company said the TPV would be 20% higher. Moreover, now PayPal estimates that its 2021 revenue will be $25.75 billion, up from the $25.5 forecast last quarter. This will also lead to higher earnings.
Morningstar points out that PayPal has a five-year average P/E ratio of 56.5. The way I use this is to multiply the 2022 forecast earnings per share (EPS) by the average P/E, and then discount it to the present to evaluate growth.
For example, analysts culled by Seeking Alpha say the 2022 EPS is forecast at $5.89. Therefore, the price target is $332.79. This represents a potential gain of 22.9% over today’s price of $270.80.
What To Do With PYPL Stock
Fortunately in my case, Wall Street analysts also believe that PYPL stock should be trading higher. For example, TipRanks.com indicates that 23 analysts who’ve written about PayPal in the last 3 months have an average target of $315.38. This is 16.5% above today’s price.
The same is true at Seeking Alpha. Their estimate of 45 Wall Street analysts is that the price should be $313.13, or 15.6% higher.
So although my price target is higher than the average analyst’s, at least I’m on the same side. Often it’s the case that I estimate the stock is worth more and analysts say it will fall. In that case, I use a probability estimate to see what the most likely case will be. But here I am reasonably confident that we can expect to see anywhere from a 15% to 23% rise in PYPL stock sometime over the next year. These are good ROI figures for most investors.
On the date of publication, Mark R. Hake did not hold a position in any security mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.