PayPal stock price has plummeted: Here’s why I’m buying this dip

PayPal (NASDAQ: PYPL) stock price continued its strong sell-off as concerns about the company’s growth continued. The shares slipped to a low of $53.85 on Friday, the lowest level in more than six years. It has slipped by over 82% from its all-time high.

The fintech industry is going through a deep meltdown after growing rapidly when interest rates were near zero. Block, the parent company of Square and AfterPay, has seen its shares plunge from its all-time high of $288.98 to about $40. 

Similarly, Affirm, one of the biggest Buy Now, Pay Later (BNPL) in the US, stock has dropped by 89% from its all-time high. Other top fintech stocks that have crashed are SoFi, Adyen, Lemonade, and Coinbase.

There are several reasons why I believe that PayPal stock price is a good buy at these levels. First, the company is still growing, even as competition from the likes of Apple is rising. The most recent results showed that the company’s total revenue grew by 8% to $7.3 billion. 

A 7.3% growth rate is not something to celebrate about when looking at PayPal, a company that was used to have double-digit growth in the past few years. However, it is worth noting that PayPal saw an exponential growth during the pandemic. As such, its slow growth is part of the normalisation process. 

Therefore, in my base case, I don’t view PayPal as a growth stock anymore. Instead, I believe that the company is a classic value stock that delivers steady revenue and profitability growth.

Second, as a value stock, PayPal has become highly undervalued. It has a forward PE ratio of just 15.72, lower than that of the S&P 500 index. Its price to free cash flow stands at 13.9 while the price to book is 3. Most importantly, its forward EV to EBITDA stands at 8.16, which is also lower than its peers.

Understandably, these valuation metrics are much lower than those of Visa and Mastercard. The latter two are simply duopolies that have learned to co-exist over the years and have a forward PE of 32% and 28%, respectively.

But their forward revenue growth is 14% while PE has a multiple of 9. PayPal’s EBITDA growth is 18.4% while Visa and Mastercard have 13% and 15%, respectively. Therefore, while PayPal deserves a lower valuation than V and MA, I believe that its stock is much undervalued.

PYPL chart by TradingView

The other reason to buy PayPal stock is based on technicals. On the weekly chart below, we see that the stock is indeed in a bad shape as it slipped by over 80% from its all-time high. The shares remains below all moving averages, which is expected.

A closer look, however, shows that it has formed a falling wedge pattern, which is one of the most popular bullish signs in the market. Now, with the wedge nearing its confluence level, there is a likelihood that the shares will rebound in the coming weeks. This recovery will likely happen after its earnings on November 1st.

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