Recently however, PayPal shares have started to experience a bit of a rebound. It seems that, finally, sentiment towards the stock is improving. Is now the time to buy more PayPal stock for my portfolio then? Let’s take a look.

PayPal shares: time to buy?

PayPal’s recent Q2 results, posted earlier this month, were pretty solid, to my mind. For the period, net revenue amounted to $6.8bn, up 10% year-on-year on an FX-neutral (FXN) basis.

Meanwhile, non-GAAP earnings per share came in at $0.93, below the figure of $1.15 posted a year earlier, but above the consensus forecast of $0.86. Free cash flow for the quarter amounted to $1.3bn, up 22% year-on-year.

During the period, the company processed 5.5bn payment transactions, up 16% year-on-year, with total payment volume (TPV) coming in at $339.8bn, up 13% year-on-year FXN.

Encouragingly, PayPal raised its guidance for the full year. It now expects adjusted profit of between $3.87 and $3.97 per share, up from its previous forecast of $3.81 and $3.93. It also announced a new $15bn share repurchase programme.

Overall, the results showed that the company is continuing to grow, even if it’s lower than it was during the pandemic (when PayPal received a major boost from online shopping).

Price target upgrades

It’s worth noting that on the back of these results, a number of brokers raised their price target for the stock. For example, Wells Fargo raised its target to $123 from $97 while BMO lifted its target to $124 from $114. This is certainly a positive development.

Could an activist investor boost the share price?

Solid growth and price target upgrades are not the only reasons to be optimistic here however. Another thing that stands out to me is that activist investor Elliott Management has recently taken a $2bn stake in the company.

Activist investors like to shake things up in an effort to help companies achieve their full potential. I’m hoping Elliott can do this here. After the stake came to light, the activist investor described PayPal as a company with “an unmatched and industry-leading footprint across its payments businesses”.

My view on PayPal stock now

Putting this all together, I’m more bullish on PayPal stock than I was a few months ago.

The stock is certainly not without risk. One that could potentially jeopardise the growth story (in the near term at least) is a major pullback in consumer spending. With so many consumers struggling at present due to high energy costs, this is certainly something to keep in mind.

However, with the stock trading at just 21 times next year’s expected earnings, I think the risk/reward profile here is relatively attractive. At current levels, I’d be comfortable adding more PayPal shares to my portfolio.

Investment pays off

After the fintech firm reported its Q2 numbers, PayPal saw its stock rise by more than 10%. This was because it beat a number of analysts’ estimates on both its top and bottom lines. In fact, the company managed to surpass its own guidance on the majority of metrics!

Nevertheless, the firm’s EPS saw a substantial decline. However, this was because of lower transaction margins from eBay, and the last year’s numbers getting a boost from the release of unneeded allowances for bad loans. Taking those factors into consideration, EPS stayed flat on a year-over-year (Y/Y) basis.

Pals bring quality

Since PayPal revised its goal of bringing more quality than quantity, it’s seen user growth decline, but PTPAA has gone up steadily. This was evident in this quarter’s numbers, with minuscule NNA, but robust PTPAA growth.

The growth can be attributed to two reasons. The first is the rise in core daily active users, which has seen a rise of more than 40% since 2019. This is crucial for PayPal because 80% of its transactions come from 30% of its most active users. The second is the continued growth of Venmo, which ended up driving more than 50% of PayPal’s revenue growth in Q2.

As such, management provided a decent outlook for the rest of the year. The Nasdaq-listed firm now expects Q3 revenue of $6.8bn, with an upwardly revised non-GAAP EPS of approximately $0.95. For the full year, it expects 10% revenue growth, with a non-GAAP EPS of approximately $3.92. The board also forecasts to grow TPV by 12%, add 10m more accounts, and have a free cash flow of at least $5bn.

Long way to grow

So, is PayPal stock worth a buy? Well, all signs seem to point towards yes. Aside from the excellent numbers and guidance provided, the impact on its cost savings are yet to be realised. Interim CFO Gabrielle Rabinovitch mentioned that PayPal expects $900m worth of cost savings in FY22, and a further $1.3bn next year. She also reiterated that the payments processor expects operating margin expansion of at least 0.5% starting in Q4. And with core markets yet to be fully penetrated, PayPal still has a long way to grow as it expands its digital wallet features to more regions worldwide.

Nonetheless, it’s worth noting that PayPal sits on $10.6bn worth of debt. But with no maturities for the rest of the year and margin expansions on the horizon, I’ve no doubt that incoming CFO Blake Jorgensen will be able to navigate through its debt pile without too much hassle.

Finally, the company saw its take rate remain flat at 2% (yoy), which is great news as PayPal continues to maintain its transactional margins while seeing TPV increase and growing its market share. Therefore, I think PayPal has a position on my portfolio with an average price target of $119.29.

I think that makes it a bargain for my portfolio. I bought some shares in the past few days. Here is why I am excited by the prospects.

Strong business growth

One approach to investing is to pay attention to market trends one personally spots, then investigate the businesses further. We have all heard people say they wish they had invested in a company when they first started using a product that then went on to become very popular.

Paypal is hardly new. But it does seem to me to have taken on more prominence over the past several years, partly as a result of a rise in online shopping during the pandemic. Looking at the numbers, revenue has more than doubled in the past five years. Meanwhile, earnings nearly tripled.

So not only is the business growing quickly, earnings are going up faster than sales. That is a demonstration to me of the attractiveness of a scalable business model like that used by the digital payments firm. It could help the company grow profit margins in future.

Paypal stock has tumbled

Despite that, Paypal stock has fallen 70% over the past year.

Clearly, not all investors have shared my enthusiasm for the shares lately. Partly, I think that is due to investors losing enthusiasm for some “stay at home” shares that soared during the pandemic. But even allowing for that, Paypal has fallen. It has not traded at this year’s levels since 2018, except for a brief period in the March 2020 stock market crash.

Investors just do not seem very excited by the outlook at Paypal. In the first quarter, net revenue growth of 7% was decent though not spectacular. But more alarming was the drop in earnings per share. They more than halved compared to the same quarter last year.

The company will announce second-quarter results this week. I am hoping the financial performance will show signs of improvement. I think concerns about that are part of the reason Paypal shares have tumbled.

Why I bought

As a long-term investor, though, quarterly earnings can be a useful data point for me but must be seen in a much fuller context.

Paypal’s installed base of customers and merchants gives it a large business moat. It also has a strong brand. In those ways, I see it as similar to businesses like Visa and Mastercard. That has the potential to help the company make big profits for years if not decades to come. Putting Paypal stock in my portfolio now will hopefully help me reap the rewards in future.

The Fed is no Pal

Just like PayPal stock, US retail sales figures have been steadily declining since February. In fact, retail sales came in at -0.3% in May, on a month-on-month basis. This is an indication that consumer spending is decreasing as a result of higher interest rates.

The US Federal Reserve is committed to increasing interest rates until inflation retreats back down to 2%. Consequently, several analysts are pencilling the odds of a recession at 50%. If this were to happen, I expect the suffering for PayPal shareholders to get worse.

With less money flowing throughout the US economy, the platform stands to earn less from payments and transfers. This is because higher interest rates means higher borrowing costs, limiting the flow of cash around the economy.

More than just PayPal

Nonetheless, PayPal has a couple of interesting developments that could make it a fortune in the long term, as the fintech group has several brands to it. These businesses are seeing encouraging growth and progress. The list includes PayPal itself, Venmo, Braintree, Paidy, Xoom, Honey, iZettle, and Hyperwallet. I’m extremely upbeat about the group’s future prospects beyond its main business. But in particular, I have my attention focused on Venmo’s prospects as an American mobile payment service.

The company has lined up partnerships with Amazon and Doordash. These big firms are expected to integrate Venmo into their payment options later this year. If successful, I envision these collaborations to bring a flood of cash to the top line for PayPal.

Quantity over quality

Having said that, it’s worth noting that the core business still remains susceptible to harsh economic headwinds. Analysts have revised the stock’s average earnings per share down from $1.24 to $0.97 for the year.

Not to mention, its Venmo partnerships are yet to come into effect. For one, management has been silent on when the Amazon partnership will take place. Secondly, Doordash is yet to agree to business terms and conditions.

However, what concerns me most is its profit margins, which have been on a decline over the last four quarters. PayPal has to compete with the likes of Wise and Western Union, having lost market share over the years. Its current take rate is 2%, which is higher than Wise’s. Therefore, for it to continue being competitive, it’ll have to cut down its margins in order to retain/grow its transaction and customer volumes.

Thinning profit margins (Despite increasing volume) shows that PayPal is losing its pricing power and market dominance. As such, I won’t be buying more PayPal stock for now. Instead, I’ll be holding onto my shares in hopes that the Amazon partnership bears fruit.

Rising inflation lowers the value of the future cash flows of companies, while also reducing the discretionary income available for consumers. These are major issues for growth stocks.

Rising interest rates also makes it more expensive to issue debt, which can stunt the growth of these companies. Therefore, the Nasdaq, an index that consists mainly of growth stocks, has sunk over 25% year-to-date and over 16% in the past year.

This has also caused significant disruption in my portfolio. But instead of panicking, I see several opportunities to buy. Here are two companies that I feel look too cheap at current prices. 

A Latin American e-commerce giant 

MercadoLibre (NASDAQ: MELI) stock soared during the pandemic, as the transition to e-commerce in Latin America quickened. However, the post-pandemic performance of the company has been far worse, and since its highs in February 2021, the MercadoLibre share price has fallen over 60%. In the past year, it has fallen around 44%, in line with many other growth stocks. I believe the sell-off has now been overdone. 

For one, financial results have continued to impress. In the first quarter of 2022, net revenues were able to soar around 67% to $2.2bn, while income also equalled $139m. These beat expectations, demonstrating that the company’s post-pandemic future remains extremely bright. Further, this has left MercadoLibre exceptionally cheap, in comparison to its historical prices. For instance, it currently trades on a forward price-to-sales (P/S) ratio of under 4, whereas last year the P/S ratio exceeded 10. 

However, this sell-off has reflected the macroeconomic uncertainties and the slow-down in e-commerce. Recently, Citigroup also noted that as the group continues to grow its fintech business, it can expect more loan losses on credit cards, which could hurt profit margins. But while this is a risk, I am still encouraged in the growth of the fintech business. This is because it offers another diversified source of revenues. Therefore, at current prices, I will continue to add more MercadoLibre shares to my portfolio. 

An even more beaten-down growth stock

If you thought MercadoLibre stock has been considerably beaten down, the PayPal (NASDAQ: PYPL) share price chart looks even worse. Indeed, it has now fallen nearly 70% in the past year, making it among the worst-performing growth stocks around. This poor performance is due to evidence of slowing growth.

But there are several reasons why I am tempted to buy more PayPal shares at current prices. For example, although growth has slowed, Q1 revenues were still able to climb 8% and they are expected to climb 12% in 2022. These seem very realistic targets. In addition, the fintech is now attempting to cut costs, which will hopefully equate to rising profits. Nonetheless, with a price-to-earnings ratio of under 30, I feel that investors are not expecting any considerable profit growth. This indicates that PayPal stock may have dipped too far. 

Therefore, although I am slightly concerned at the rising competition in the fintech space, I am likely to still add more PayPal shares to my portfolio. 

A cheap biotechnology stock

AbCellera Biologics (NASDAQ: ABCL) is a biotechnology firms that researches and develops antibodies. However, the stock has continued to fall and over the last 12 months it has sunk around 70%. This seems entirely detached from the company’s performance. 

For example, in 2021, AbCellera reported revenues of $375m, an increase of 61% year-on-year. This also converted into strong profits as net earnings reached $153m, up from $119m the year before. From a valuation perspective, this puts AbCellera on a price-to-earnings ratio of around 16. For a biotechnology company that’s seeing growth, this seems very cheap, and might appeal to Warren Buffett.

But there are some reasons why AbCellera trades on a low P/E ratio. For example, the reason why profits have been so large recently is the company’s development of bamlanivimab, which has been used as a coronavirus treatment, in partnership with Eli Lilly. This has contributed towards the majority of AbCellera revenues and earnings over the past couple of years. 

But even with coronavirus becoming less prominent, I’m still confident about the future of AbCellera. For instance, at the end of 2021, the company had 156 programmes under contract (a 51% year-on-year rise) and five programmes in the clinic (compared to just one the year before). This may explain why there has been significant amounts of insider buying recently, which is another bullish sign. Therefore, I feel that now that it’s beaten-down, Warren Buffett would be tempted to buy this stock. I’m also keen, and am tempted to add more AbCellera shares to my portfolio.

A fintech with the quality Warren Buffett requires 

Warren Buffett only buys quality companies and after years of outperformance, PayPal (NYSE: PYPL) is, I feel, such a business. Its recent Q1 results continued to demonstrate the firm’s dominance in the fintech space. Revenues rose 8% year-on-year to $6.5bn and total payment volume grew 15% to $323bn. Unlike other growth stocks such as Netflix, PayPal was able to continue growing users, seeing an increase of 2.4m accounts in Q1. 

Nonetheless, while these results were positive, they do still show that growth is slowing considerably. For example, revenues for 2022 are ‘only’ expected to rise around 12%, compared to 17% the year before. 

But after the share price has fallen 65% in the past year, I feel this has been factored in. Indeed, PayPal now has a P/E ratio of just 30, far lower than it has been historically. This represents the value Warren Buffett looks for. Further, the company’s subsidiary Venmo, continues to grow rapidly, and a tie-up with Amazon, to be implemented later in the year, should progress this growth further. As such, with a reasonable valuation, and its continued dominance in the fintech space, I’ll continue to buy PayPal stock. 

More pals

PayPal managed to surpass expectations with a growth rate of 8% year on year (Y/Y), as revenue came in at $6.5bn. Its earnings per share (EPS) was also in line with consensus, at $0.88 on a non-GAAP basis. Additionally, total payment volume (TPV) was up 15% Y/Y. The number of transactions per account was also up 11% on annual basis. Moreover, the fintech company added 2.4m net new active customers. PayPal’s Venmo business also saw a 12% increase Y/Y in TPV. These are all good signs.

A price to pay

While the figures for Q1 were great, the numbers behind the curtain make me worry as an investor. PayPal saw a 32% decline in free cash flow as the company incurred a -$0.20 EPS loss from lower transaction margin dollars from eBay. This was made worse by a loss from taxation (-$0.07 EPS) and credit losses (-$0.06 EPS). As for the elephant in the room, Russia, the loss of revenue from the region created a -$0.03 EPS loss from the suspension of transactional services.

To make matters worse, PayPal’s assets decreased as liabilities went up. Although the firm’s balance sheet is still in a rather healthy state, it could take a wrong turn if finances are not managed efficiently. The imminent departure of CFO John Rainey may not help.

More importantly, PayPal saw its take rate continue to decline along with its transaction margin losing 5%. Take rate is the percentage PayPal takes from each transaction as a form of commission, and is its main stream of income. With competition rising from other fintech companies such as Block and Wise, PayPal has been forced to lower its take rate to stay relevant. Although the discounted take rate has encouraged transaction volume, it’s only a matter of time before it starts impacting profit margins further.

Blue chip

On the brighter side of things, there are a couple of expansions that should help PayPal’s traffic. The introduction of PayPal Later in Japan and Germany, as well as Savings to PayPal Wallet in the US should bring some much needed momentum to PayPal’s growth. Nevertheless, 8% earnings growth isn’t ideal for a supposed growth stock.

So, is the PayPal growth story over then? It could be. The biggest fintech company in the world continues to lose market share to its peers. Venmo, seems to be the firm’s only growth prospect, but a TPV growth rate of 12% isn’t going to boost the PayPal share price to its highs of $300 anytime soon. Not to mention, the firm refuses to disclose the proportion of income it generates from its respective businesses in greater detail, which leaves me concerned as a shareholder, as this usually means that revenue isn’t meaningful enough. As such, I will be holding to see what comes of the Amazon partnership later this year.

Why has PayPal stock dropped?

PayPal has fallen nearly 70% over the past 12 months for several reasons. Firstly, there have been a couple of very disappointing trading updates, demonstrating poor growth. Most recently, this included weak forward guidance as revenues are ‘only’ expected to increase around 16%, against previous expectations of around 18%. Adjusted earnings per share are also expected to remain largely flat. Further, PayPal abandoned its medium-term goal of reaching 750m users. This poor forward guidance can be attributed to inflationary pressures and weakening e-commerce figures. There’s also increasing competition in the payments sector, including Apple and Google Pay. 

The other reason for the recent drop is the weakness in all growth stocks now. Indeed, the high rate of inflation is particularly devastating for growth stocks, as these companies gain a large amount of their valuation from the value of future cash flows. High inflation also equates to higher interest rates, which increases the cost of borrowing. As PayPal has nearly $10bn in debt, this could increase costs further. 

Why do I think Warren Buffett would buy?

There are two main reasons that I think Warren Buffett would be tempted to buy PayPal stock. 

Firstly, he’s a big fan of value stocks, and PayPal is trading at a very cheap valuation at the moment. For example, it has a price-to-earnings ratio of just under 20, which is historically low. Indeed, last year, the P/E ratio reached as high as over 70. PayPal is currently priced at similar levels to its price after the stock market crash in March 2020. Despite this, revenues and profits have grown considerably since this moment. This means the recent drop seems well overdone, and I feel a recovery could be under way. 

PayPal is also a quality company, another factor I feel could tempt Warren Buffett to buy. For example, the company has an extremely healthy balance sheet, thanks to strong free cash flow generation. This has allowed the company to repurchase its own shares recently, so it has avoided share dilution. Due to the current low PayPal share price, I feel these share buybacks can be increased, which should help boost the shares. 

PayPal is also exploring other avenues for growth, including a partnership between its subsidiary Venmo and Amazon. Hopefully, this can help restore PayPal to its prior strong growth. 

Overall, I feel that these positives far outweigh the negatives, and this is why I may add more PayPal shares to my portfolio. 

This is all part and parcel of the journey when you’re investing in stocks and shares. However, there’s one investment lately that’s caught my eye and is leaving most investors divided on its future prospects.

What’s the growth stock?

The investment in question here is PayPal (NASDAQ:PYPL). After a surging share price performance in recent years (partly due to the coronavirus pandemic growth and tech boom), PayPal’s had a tough time lately.

In just six months, the price of this once sought-after growth stock has plunged almost 60% from roughly £207 ($270) toward the end of October 2021 to just £79 ($103) at the time of writing.

Drops like this are not uncommon among high-growth equities famed for volatility. However, what’s fairly unusual is that PayPal is a well-established business that’s been around for years, and is a proven money-maker.

PayPal is not an unprofitable ‘disruptor’ stock that’s haemorrhaging money left, right, and centre. This is a firm that’s been around the block and seen plenty of payment companies come and go, falling by the wayside. 

Why I think PayPal is a growth stock potentially worth me buying

The share price is making headlines, but I don’t think this is a business that’s down and out.

There are still plenty of compelling reasons why I believe this is a growth stock worth picking up and holding onto for the long haul:

• Strong record of increasing revenue year-on-year
• Healthy cash flow being injected into the company
• An ability to follow through with lots of share buybacks from a position of strength not desperation
• Massive cash reserves of around £14bn
• Huge amount of active users, including roughly 34m vendor accounts
• The company has shown it can innovate and make big moves, like with its foray into the world of crypto

Reasons I should be wary with PayPal stock

Although there are plenty of reasons I’m happy to pick up this growth stock at current price levels, I also have some reservations. Here’s why I’m wary and not diving in all guns blazing:

• Revenue growth has been slowing down, from 21% in 2020 to 18% in 2021.
• The company’s flagship P2P (peer-to-peer) payment app Venmo has also seen payment volume slow to a near standstill.
• Some suggestions that sentiment amongst younger users view the company as old hat, preferring the likes of Apple Pay.

What’s next for PayPal as a growth stock?

There’s no question that the level of growth has slowed down significantly. But, I think PayPal is an excellent buy at the current price level.

It has a massive user-base, great cashflow, and it is still growing.

It’s a company that’s not afraid to innovate or change direction, and I believe that open-mindedness is going to allow it to remain a big player in the payments sector throughout the years to come.

I don’t expect a quick bounce-back, but I’m hoping for steady and manageable growth.

Stock pick #1 – Alphabet

Warren Buffet has always said that the best companies are those that exhibit solid fundamentals, strong earnings power, and the potential for continued growth. Alphabet (NASDAQ: GOOGL) manages to tick all these boxes. With a strong balance sheet, a 29.5% profit margin, and plenty of room for earnings growth with some analysts predicting a 22% upside to its current share price, the Google-parent stock is a no-brainer for me. Furthermore, despite having legal challenges as a big tech company, Alphabet has a history of outperforming the S&P 500. Its upcoming stock split this summer could work wonders for the share price as well. History has shown that stock splits tend to boost share prices as they encourage higher trading volume. Therefore, a solid balance sheet accompanied by strength in the search engine and advertising space makes Alphabet a hybrid defensive-growth stock for my Stocks and Shares ISA.

Stock pick #2 – PayPal

Although the PayPal (NASDAQ:PYPL) share price is 60% off its all-time-high, I think the fintech company still has plenty to offer. Despite a miss on its earnings last quarter, I am excited by PayPal’s revised business model. The platform is targeting more activity per user rather than more users. This is music to my ears because I value quality over quantity. Its partnerships with Amazon, Starbucks, and Doordash to integrate Venmo, an American mobile payment service it owns, will also provide a boost to its revenue. Its previous partnership with eBay generated a sizeable portion of revenue, showing me that PayPal has had some historical success. It could, however, suffer the effects of a high interest rate environment as transaction volume could slow down. Despite its interest income segment earning it revenue, it might not be sufficient to keep investors happy. Yet it’s also hedged against such a potential slowdown. The firm’s interest income segment hedges against rate hikes as it stands to earn revenue from interest too.

Stock pick #3 – Astra Space

Next up on my list is Astra Space (NASDAQ: ASTR). Astra sends small rockets into space to deliver satellites and other payloads for its commercial customers. As a pre-profit company, Astra carries a high level of risk, but with it also comes a high potential upside to its current share price. Since the Alameda-based company launched its first successful payload in March, the share price has shot up 21%. With more launches lined up and monthly launches planned for the rest of 2022, there could be room for the share price to continue growing. Astra also boasts a flawless balance sheet with zero debt, adequate cash levels, and a healthy cash burn. This gives me plenty of confidence to continue buying Astra shares as there is a low probability that the company will need to raise capital in the near future.

No dividends

These are all growth stocks with no official dividends. Nevertheless, the potential upside to the stocks’ share prices offsets the growth of regular dividend-paying stocks, in my opinion. This is why I’ll be buying all three stocks for my portfolio.