Bad news for PayPal (NASDAQ:PYPL) investors — PYPL stock has lost more than 67% of its value since July 2021. Despite a temporary stabilization in December of the same year, PYPL faced a steep crash in early 2022. The tech selloff in early January of this year wiped hundreds of billions off of it and other major tech companies such as Meta (NASDAQ:FB), Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN) and Apple (NASDAQ: AAPL). Paypal was among the hardest hit from the selloff.
Although PayPal has lost a lot of its value, I believe it is far from being grossly undervalued. According to MacroTrends, PYPL has maintained steady revenue growth. Its latest yearly revenue is $25.4 billion, whereas the quarterly revenue stood at $6.9 billion. Despite the revenue increase, PYPL will not necessarily rebound in the short term.
PYPL’s 67%-plus crash can more or less be attributed to its overvaluation. In July 2021, PayPal reached an all-time high of over $362.2 billion in market capitalization. Compared to February (before the Covid-19 crash), this is a 150%-plus jump in valuation in 17 months. Paypal’s revenue increased around 33% in the same period.
How PYPL Stacks Up to Other Companies
Despite its losses, PYPL is still a large company. Its current market cap of $116.4 billion does not seem significantly undervalued compared to similarly valued tech stocks.
|Company||Ticker||Revenue (Billions, 2021)||Market Cap (Billions)||Year-on-year Growth|
Source: MacroTrends and Google Finance
PayPal might not be grossly undervalued, but that doesn’t mean it’s a bad stock to buy. PYPL could still see a steady rebound in the long term as market fears start to subside. PayPal and its subsidiaries, Venmo and Xoom, are still well-known, and I expect that their revenue will continue to grow along with the general economy.
Of course, more factors determine a company’s market capitalization than just revenue. Companies such as Tesla (NASDAQ:TSLA) had a revenue of $53.8 billion in 2021 and have a market cap of $843 billion. Shopify (NYSE:SHOP) had a revenue of $4.6 billion and still maintains a market cap of $72 billion. Compared to such overvalued companies, PayPal will look like a bargain.
Unfortunately, these expectations will inflate the true potential of what PYPL’s fair value would look like.
According to Alphaspread, PYPL’s DCF intrinsic value (IV) is undervalued by 29% at $135.75 in the base scenario. However, the intrinsic value changes considerably in both a bull and a bear scenario. In a bear scenario, PYPL’s IV would be $130.20, and in a bull scenario, it would be $255.72. An overvaluation of 27% and an undervaluation of 63%, respectively. If we look at the current world market, I would not recommend buying PYPL as it could fall sharply in the coming days.
PYPL Could Profit From Crypto
PayPal is still widely accepted as a payment method by most vendors. However, cryptocurrencies could soon become an alternative to PayPal as more and more business start accepting crypto for payments.
However, PayPal seems to be adapting as it allows its users to buy cryptocurrency on its platform and its subsidiary, Venmo. Unfortunately, the cryptocurrency you can buy on PayPal is only treated as an investment rather than a payment method.
You cannot deposit, nor can you withdraw cryptocurrencies to and from a third-party wallet. PayPal has made promises to enable those features, but that has yet to be implemented.
PayPal could keep up with the changing landscape by supporting cryptocurrency payments. But as of now, third-party exchanges seem like better options due to the autonomy they provide to their user.
However, cryptocurrencies are still years or even decades from gaining mainstream usage as a payment method. honestly, it is still a debate on if crypto will ever go mainstream. So when calculating PayPal’s future potential, I would put them out of the equation.
In short, I believe that PayPal is not undervalued by an excessive margin and it is still risky due to the current state of the economy. If you still wish to invest into PayPal, I would recommend dollar cost averaging capital that you would be comfortable taking significant losses on at least until the PYPL shows any signs long term recovery.
On the date of publication, Omor Ibne Ehsan did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.