Valuation Looks Compelling After Recent Sell-Off, Says Analyst

While the main indexes all posted healthy growth over 2021, the year marked a reversal of fortunes for many stocks which flourished during 2020. The digital payment segment is a good example as the sector found the past 12 months far less hospitable.

As e-commerce volume growth spiked during the start of the pandemic in 2020, so did the valuations of many payment technology stocks. Yet, with the waning of economic stimulus, industry volume growth challenged by supply chain constraints, and the reopening changing consumers’ spending behavior, the segment came under pressure in 2021 with many names taking a hit.

As such, with the new year upon us, BMO analyst James Fotheringham believes several names in the sector are “set up constructively.” One of which is digital payments giant PayPal (PYPL), whose stock slipped by 19% in 2021.

Behind Fotheringham’s renewed confidence is an interesting quirk. “Since the first payment technology stock went public back in 1997, there has developed an impressively reliable historical correlation between revenue growth and value,” the 5-star analyst explained.

So, while PayPal enjoyed what Fotheringham calls the “rarity value of a business model that actually benefitted from global lock-downs,” the past year has seen that valuation come back down to earth. Or as the analyst puts it, PayPal is now trading “below levels implied by the industry-wide cumulative historical function relating organic revenue growth potential to value.”

And although the analyst believes competition, macroeconomic trends and “business mix on growth and margins” are reasons why the company faces “uncertainty,” the analyst thinks the valuation risks are now “skewed to the upside.”

So, what does this mean for investors? Fotheringham upgrades PayPal shares from Market Perform (i.e. Hold) to Outperform (i.e. Buy), and gives the stock a $224 price target. This figure implies ~15% upside potential from current levels. (To watch Fotheringham’s track record, click here)

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Turning now to the rest of the Street, where most analysts remain on PayPal’s side; the stock’s Strong Buy consensus rating is based on 17 Buys vs. 4 Holds and 1 Sell. The forecast calls for 12-month gains of 41%, given the average price target comes in at $269.07. (See PayPal stock analysis on TipRanks)

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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.