• If you are wondering whether PayPal Holdings at around US$50 per share is a bargain or a value trap, the key is to look closely at what the current price implies about its future.
• The stock recently closed at US$50.39, with returns of 1.2% over the last week and 11.1% over the last month, while the year to date return stands at a 13.3% decline and the one year return at a 26.1% decline.
• Recent coverage has focused on PayPal's position in digital payments and how competitive pressures and changing consumer habits could influence sentiment. This context helps explain why the stock shows both shorter term strength and weaker multi year returns as investors reassess the risk and reward trade off.
• On Simply Wall St's valuation checks, PayPal scores a 5 out of 6. This sets up a closer look at how different valuation methods line up for this stock and hints at an even more useful way to think about value at the end of the article.

Approach 1: PayPal Holdings Excess Returns Analysis

The Excess Returns model looks at how much value a company can create over and above the return that shareholders require. Instead of focusing on cash flows, it compares the return on equity to the cost of equity and capitalizes the difference into an intrinsic value per share.

For PayPal Holdings, the model uses a Book Value of $22.02 per share and a Stable EPS of $6.20 per share, based on weighted future Return on Equity estimates from 8 analysts. The Average Return on Equity is 22.81%, while the Cost of Equity is $2.06 per share. That leaves an Excess Return of $4.14 per share, which is what shareholders might be paid for taking on risk beyond the required return.

The Stable Book Value is $27.17 per share, based on weighted future Book Value estimates from 8 analysts. Combining these inputs, the Excess Returns model arrives at an estimated intrinsic value of about $126.28 per share. Compared with the recent share price around $50, the model suggests the stock is 60.1% undervalued.

Result: UNDERVALUED

Our Excess Returns analysis suggests PayPal Holdings is undervalued by 60.1%. Track this in your watchlist or portfolio, or discover 48 more high quality undervalued stocks.

Approach 2: PayPal Holdings Price vs Earnings

For a profitable company, the P/E ratio is a straightforward way to connect what you pay for the stock with the earnings it generates. It helps you see how many dollars investors are currently willing to pay for each dollar of earnings.

What counts as a “normal” or “fair” P/E depends on how the market views a company’s growth prospects and risk. Higher expected growth or lower perceived risk can be associated with higher P/E levels, while slower growth or higher risk can be associated with lower ones.

PayPal Holdings currently trades on a P/E of 8.66x. This sits below the Diversified Financial industry average P/E of 17.73x and also below the peer group average of 31.41x. Simply Wall St’s Fair Ratio for PayPal’s P/E is 14.78x, which is a proprietary estimate of what the P/E could be given factors such as earnings growth, profit margins, industry, market cap and company specific risks.

The Fair Ratio can be more informative than a simple peer or industry comparison because it adjusts for these characteristics rather than assuming all companies should trade at similar multiples. Comparing PayPal’s current P/E of 8.66x with the Fair Ratio of 14.78x points to the stock trading below that Fair Ratio.

Result: UNDERVALUED

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Upgrade Your Decision Making: Choose your PayPal Holdings Narrative

Earlier the article alluded to a better way to think about valuation, so here is Narratives, a simple way for you to set a story for PayPal Holdings, tie that story to your own assumptions for fair value, revenue, earnings and margins, and then see how it stacks up against what other investors are thinking on Simply Wall St’s Community page.

A Narrative is your view on how a company’s business might play out, linked directly to a set of numbers. Instead of only looking at a P/E or a model output, you connect PayPal’s competitive position, products and risks to a forecast and then to a fair value that you can compare with today’s share price to help judge whether you see it as attractive or not.

Because Narratives sit on Simply Wall St’s platform and are used by millions of investors, they are kept current. When new earnings, product launches or news on PayPal arrive, the forecast and implied fair value in each Narrative update. This means you can see when your view or the community’s view starts to drift away from the market price.

On PayPal’s Community page, for example, one investor Narrative currently applies a fair value of about US$32 per share based on cautious assumptions for profit margins and growth. Another Narrative at the other end of the range sees fair value near US$190, reflecting higher assumed revenue growth, margins and a richer future P/E. Comparing those two stories side by side helps you decide which set of assumptions feels closer to your own before you act on the gap between Fair Value and Price.

For PayPal Holdings however, we will make it really easy for you with previews of two leading PayPal Holdings Narratives:

On Simply Wall St, Narratives sit on a spectrum. Some are built around upside scenarios where the current price looks too low, while others lean on more cautious assumptions and frame the stock as expensive. Seeing both side by side helps you decide which story feels closer to your own view and what you want to build into your next steps.

Fair value: US$111.57 per share

Implied discount to this fair value: 54.9% compared to the recent price of US$50.39

Revenue growth used in this Narrative: 5%

• Views PayPal as a well known online payments brand that could benefit from long term growth in e commerce and broader digital payment adoption, including social commerce and emerging markets.
• Leans on company level drivers such as Venmo, checkout improvements, omnichannel expansion and a US$15b buyback program as supports for earnings per share growth and shareholder value.
• Flags competition, contract renegotiations and the Honey lawsuit as risks, but frames them as manageable within an overall thesis that still reaches a fair value well above the current share price.

Fair value: US$32.00 per share

Implied premium to this fair value: 57.7% compared to the recent price of US$50.39

Revenue growth used in this Narrative: 2.56%

• Focuses on threats to PayPal’s core business from central bank digital currencies, account to account and blockchain payment rails, as well as low or zero fee offerings from fintech and big tech competitors.
• Builds in higher regulatory and compliance costs and a shift of users toward super apps, which together are assumed to weigh on margins, user growth and long term earnings power.
• Uses conservative assumptions for revenue growth, profit margins and future P/E, and arrives at a fair value that sits well below the current share price even after considering corporate action talk such as breakups or takeovers.

If you want to go further than these previews, you can read the Narratives in full, compare them with 9 other community views and then set up your own assumptions for PayPal on Simply Wall St’s platform. That way, any gap you see between your fair value and the market price is anchored to numbers you understand and are comfortable tracking over time.

To see how these results tie into long-term growth, risks, and valuation, check out the full range of community narratives for PayPal Holdings on Simply Wall St. Add the company to your watchlist or portfolio so you'll be alerted when the story evolves.

Do you think there's more to the story for PayPal Holdings? Head over to our Community to see what others are saying!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.