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Why PayPal Popped Today

What happened

PayPal stock (NASDAQ: PYPL) popped in Wednesday trading after two separate analysts lowered their price targets on the the same time as both analysts insisted that the fintech giant is undervalued at today's prices.

As of 12:50 p.m. ET, PayPal stock is up 3.5%.

Image source: Getty Images.

So what

In twin reports, tiny San Francisco broker BTIG and then gigantic megacorp Citigroup cut their price targets on PayPal shares steeply, to $270 and $235 a share, respectively.

We don't know exactly what Citi's concerns were, but in a note out this morning, relayed a few details of BTIG's report, highlighting "the decline in equity multiples that has occurred in recent weeks among growth stocks." As BTIG explained, higher interest rates and other so-called headwinds appear to be to blame for investors shying away from growth stocks.

Now what

That being said, BTIG argued that while the reduction in earnings multiples has some basis, the sell-off in PayPal's case has become "excessive."

And yes, over the last six months, shares of the fintech giant have sold off by some 47% -- getting almost literally cut in half as investors fled growth in favor of value. But does that necessarily mean PayPal stock is undervalued today? Does it mean PayPal stock is due to shoot up 43% this year (as Citigroup says) -- or even 65% (as BTIG predicts)?

I don't think so.

Consider: With $5 billion in free cash flow, or FCF (and nearly as much GAAP profit), PayPal stock currently sells for 37 times FCF and 38 times earnings. Maybe you could argue that with an 18% projected long-term earnings growth rate, those valuations are reasonable. They're certainly not cheap, however, and I don't agree that PayPal is guaranteed to return to anywhere near the prices its shares fetched six months ago.

For that reason, I'm going to have to disagree with Citi and BTIG on this one. At best, PayPal shares might be fairly priced after their recent sell-off, but I personally believe they have much fUrther to fall before reaching bargain territory.

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Citigroup is an advertising partner of The Ascent, a Motley Fool company. Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns and recommends PayPal Holdings. The Motley Fool has a disclosure policy.


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