According to a Wall Street analyst, there are 1 great growth stocks we need to buy before they soar 120%

By | December 20, 2023

Bull market 4

Bull market 4

At the outbreak of the pandemic PayPal shares (NASDAQ:PYPL) reported turbo growth as business closures and social distancing pushed consumers online. But the momentum faded as high inflation hampered discretionary spending, so much so that management set aside its medium-term financial targets.

Many investors interpreted that as a sell signal. Shares of PayPal had already begun to fall in response to economic uncertainty, but the selloff accelerated as the company revised its outlook. That downward pressure has never really abated, as PayPal has seen its stock price fall 14% year to date, despite strong gains around the world. S&P500and the stock is now trading 80% below its all-time high.

Many Wall Street analysts see that as an opportunity. PayPal has a consensus Buy rating and the 12-month average price target of $69.83 implies an upside of 14% from the current share price. But Morning star Analyst Brett Horn is especially optimistic: his price target of $135 per share implies an upside of 120% for PayPal shareholders.

With that in mind, the S&P 500 is less than 2% below a new all-time high (and a new bull market), a milestone that typically signals a period of significant gains in the stock market. Is Now a Good Time to Invest in PayPal?

PayPal reported solid financial results in the third quarter

PayPal beat consensus estimates on both the top and bottom lines in the third quarter. Revenue rose 8% to $7.4 billion thanks to a double-digit increase in the number of transactions and payments. Non-GAAP net income rose 20% to $1.30 per diluted share as the company continued to prioritize cost control and share buybacks. But new CEO Alex Chriss sees room for improvement.

“I think our cost base and complex structure are slowing us down,” he said during the November earnings call. “We have opportunities to accelerate our revenue growth while lowering our costs.” Chriss also mentioned three areas where the company will focus its investments: (1) digital wallets for consumers, (2) branded PayPal payment solutions for small businesses, and (3) unbranded payment solutions like Braintree for large enterprises.

PayPal is the market leader in online payment processing

PayPal benefits from a data advantage that comes from its two-sided network. Specifically, most processors form relationships with merchants, but PayPal offers financial products to merchants and consumers, meaning it has a deeper understanding of consumer preferences and purchasing habits. PayPal applies artificial intelligence (AI) to that information to gain customer insights, increase approval rates and prevent fraud for merchants.

Chriss explained that benefit during the most recent earnings call:

Our machine learning capabilities combine hundreds of risk and fraud models with dozens of real-time analytics engines and petabytes of payment data to generate insights by learning users’ behavior, relationships, interests and spending habits. This scale gives us a very unique advantage in the market. Our ability to create meaningful profiles using AI is exceptionally promising.

The result of that unique advantage is that PayPal is the most accepted digital wallet in North America and Europe, dominating the online payment processing space with a market share of over 40%. For context, PayPal has almost twice the market share of its closest competitor, Stripe.

That points to high-single-digit revenue growth (at least) for years to come, simply because PayPal is a critical part of the global e-commerce infrastructure, and online retail sales are expected to grow 8% annually through 2030. But that estimate leaves room for gains if PayPal gains share in e-commerce or gains ground in brick-and-mortar retail.

On that note, the company recently announced that US consumers can add PayPal and Venmo credit and debit cards to their account Apple Wallets and use them anywhere Apple Pay is accepted. This partnership could help PayPal gain market share at physical points of sale, as Apple Pay is the most popular in-store mobile payment option among U.S. consumers.

PayPal stock looks downright cheap at its current price

Morningstar’s Brett Horn expects PayPal to achieve 10% annual revenue growth over the next decade. That estimate is reasonable given the company’s strong presence in online payment processing and its commitment to more effective innovation in key product categories. In that light, the current valuation of 2.4 times sales seems cheap, especially when you compare it to the three-year average of 6.9 times sales.

That creates an attractive buying opportunity for patient investors, especially as the S&P 500 approaches bull market territory. But the key word is patient. There’s no guarantee that shareholders will make money in the next year, and the chances of triple-digit returns are slim at best. PayPal stock is best viewed as a long-term investment.

Should You Invest $1,000 in PayPal Now?

Before you buy shares in PayPal, consider the following:

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Trevor Jennevine has positions in PayPal. The Motley Fool has positions in and recommends Apple and PayPal. The Motley Fool recommends the following options: Short December 2023 $67.50 on PayPal. The Motley Fool has a disclosure policy.

A bull market is coming: One great growth stock needs to be bought before it rises 120%, according to a Wall Street analyst, originally published by The Motley Fool

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