It is no secret that technology stocks outperformed for most of 2023 despite fears of a coming recession brought on by the FED's hawkish stance and their aggressive interest rate hikes. Gaps become clear when comparing the Technology Select Sector SPDR Fund (NYSEARCA: XLK) and its performance against the S&P 500 on a year-to-date basis.
A net performance of 55.6% would place the technology sector at a 31.7% performance gap above the S&P 500, and now that the FED has pivoted into a more dovish view, with up to six rate cuts planned for 2024, just imagine where the potential ceiling could rise up to for this group of stocks.
What is interesting is that some stocks, like PayPal (NASDAQ: PYPL), have fallen behind the sector, not only underperforming it by 73.2% on a year-to-date measure, but this stock is also trading at 69.0% of its 52-week highs, while the rest of the industry sits on 97.3%.
That could be the first pillar for a potential value play in this name for reasons that will become clear in just a bit.
Making sense of it
Stocks like Meta Platforms (NASDAQ: META) have been seeing a boost in price action lately, especially as the FED turns its projections to a more dovish environment and the market digests those rate cuts. But why is it that Meta would rise on the news?
You see, most of Meta's revenue comes from advertising on Facebook and Instagram platforms, and who is advertising in those places? Well, anyone from big public businesses with multi-million dollar budgets and the mom-and-pop shop looking to expand its online presence.
Now that money is set to become cheaper and more abundant thanks to the FED, these businesses will have a more flexible capital structure to place advertising dollars that eventually will make their way to Meta. How does this relate to PayPal? Well, it's why these businesses will be looking to increase their online advertising.
Advertising budgets will be approved due to expected increases in demand, which will also result from making money cheaper and financing more accessible. Considering that one of PayPal's functions is their solutions to small and medium-sized business transactions, the protein is found here.
It is no wonder that analysts at Morgan Stanley (NYSE: MS) have landed on a $118.0 price target as of November for this stock, which, by the way, implies that PayPal stock needs to rally by 92.2% from where it trades today. Enough upside for you?
Factcheck
Knowing what you know now and understanding that the company's revenues are set to boom in the coming cycle, the fact that PayPal stock trades at 69.0% of its 52-week high can begin to raise a set of eyebrows in the value investing audience.
Taking the internet software industry as an average, it is being valued at a 40.3x price-to-earnings ratio. Where does PayPal land? Try a 69.4% discount to the industry with its 12.3x valuation multiple. With its price targets nearly double, this discount becomes all the more attractive.
Competitors like Block (NYSE: SQ) can be found valued at a 38.9x P/E multiple, which is awfully close to the industry average and barely a bargain at all. While the past is no reflection of the future, it does provide a reality check moving forward, so here's PayPal's past:
According to the third quarter of 2023 financial results, total payment volumes at PayPal increased by 15.0% over the past twelve months, and its revenues jumped by 8.0%. Remember, these metrics moved this favorably during a year when rate hikes and compressing inflation drove business activity to the lower end.
While analysts see earnings per share growing by 14.3% in the next twelve months, the past twelve months brought on a 20.0% jump during a slow year for PayPal. Adjusting projections as PayPal's business ramps up could drive more analyst upgrades shortly.
But the buck doesn't stop there; insiders have been quietly betting on a brighter future for PayPal stock. How can you tell? Management placed $1.4 billion toward repurchasing stock in the open market, which could mean they see it as undervalued today.
Keep in mind, last time the FED cut rates (2020-2021), PayPal stock rose to its all-time high price of $310.16 a share; a long way to go, but history could repeat itself.
You are savvy enough to guess what could happen to the stock if analysts move their bar higher, and you know what missing out feels like.
