Despite posting strong results for the third quarter, PayPal Holdings, Inc. (Nasdaq: PYPL) took a double plunge in the last trading session. Cautious directions seemed to scare the market, while other positive catalytic news failed to reverse the downtrend that had been in progress for months.
With the stock down more than 30% from its summer highs, in this article, we’ll look at the valuation according to our model.
Revenues: $6.18 billion (13% increase from Q3 2020)
net income: $1.09 billion (6.5% increase from Q3 2020)
Profit margin: 18% (down from 19% in Q3 2020)
The company reported a strong third-quarter result with improved earnings and revenue, despite weaker margins. Over the past three years, on average, earnings per share have increased by 35% annually, and the company’s share price has increased by 35% annually.
While PayPal has announced that it will not pursue the acquisition of Pinterest, its stock has not regained the ground it lost upon the initial rumor. One of the interesting moments was “Selling rumors, selling news”.
Meanwhile, Chief Financial Officer John Rainey Caution is advised Regarding the start of next year, especially with regard to the carry-over of eBay payments and their comparison to the beginning of this year which has been hit hard by government incentives.
This has led to a series of target price adjustments, with Morgan Stanley now seeing it at $265 (reviewed from $340), Oppenheimer at $268 (from $329), and Citi at $300 (from $329) ). However, after acknowledging the headwinds — citing supply chain issues, the disappearance of stimulus, and other aftershocks of the pandemic, they remain positive on stocks.
One of the main reasons for this could be the Venmo deal announce with amazon. The popular mobile payment service owned by PayPal will be available as a payment option on Amazon.com in 2022.
Approaching intrinsic value
The discounted cash flow (DCF) model believes that a company’s value is the present value of all the cash it will generate in the future. It works by taking a company’s expected future cash flows and discounting them to the present value.
However, DCF is just one rating scale among many, and it is not without flaws.For those passionate learners of stock analysis, Simply Wall St Analysis Form here It might be something that interests you.
We use a two-stage growth model, which means we take two stages of a company’s growth. In the initial period, the company may have a higher growth rate, and the second phase is usually assumed to have a constant growth rate.In the first stage, we need to estimate the company’s cash flows for the next 10 years.Where possible, we use analyst estimates, but when not available, we infer the previous free cash flow (FCF) from the last estimate or value reported.
We assume that companies with contracting free cash flow will slow their rate of contraction and that companies with increased free cash flow will experience a slowdown in their rate of growth during this period. We do this to reflect that growth tends to slow more in the early years than in later years.
In general, we assume that the dollar today is more valuable than the dollar in the future,The sum of these future cash flows is then discounted to the present value:
10-Year Free Cash Flow Forecast (FCF)
Levered FCF ($1 million)
7.47 billion US dollars
9.25 billion US dollars
10.9 billion US dollars
12.6 billion US dollars
13.8 billion US dollars
14.8 billion US dollars
15.7 billion US dollars
16.4 billion US dollars
17.0 billion US dollars
17.6 billion US dollars
Growth rate estimation source
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Estimated @ 7.38%
Estimated @ 5.76%
Estimated @ 4.62%
Estimated @ 3.82%
East @ 3.26%
Present value ($1 million) reduced by 6.5%.
7.0 thousand US dollars
8.2 thousand US dollars
9.0 thousand US dollars
9.8 thousand US dollars
10.1 thousand US dollars
10.1 thousand US dollars
10.1 thousand US dollars
9.9 thousand US dollars
9.6 thousand US dollars
9.3 thousand US dollars
(“Est” = FCF growth rate estimated by Simply Wall St) Present value of 10-year cash flow (PVCF) = 93 billion US dollars
After calculating the present value of the future cash flows in the first ten year period, we need to calculate the terminal value, which is all future cash flows after the first stage.For a number of reasons, a very conservative growth rate is used that cannot exceed the growth rate of a country’s GDP. In this case, we used the 5-year average of the 10-year government bond yield (2.0%) to estimate future growth. In the same way, as with the 10-year “growth” period, we discount future cash flows to their present value, using a 6.5% cost of equity.
Final Value (TV)= FCF2031 x (1 + g) ÷ (r – g) = $18 billion x (1 + 2.0%) ÷ (6.5% – 2.0%) = $391 billion
Final Value Present Value (PVTV)= tv / (1 + p)10= $391 billion (1 + 6.5%)10= 207 billion US dollars
The total value is the sum of the cash flows for the next 10 years plus the discounted terminal value, which results in the total value of equity,In this case, it is 300 billion US dollars.To get the intrinsic value of the stock, we divide this by the total number of shares outstanding.
The company is shown in comparison to the current share price of $205About fair valueAt a 20% discount on where the stock price is currently trading.Assumptions in any calculation have a significant impact on valuation, so it’s best to look at this as a rough estimate, not accurate to the last cent.
Now the most important input for discounted cash flow is the discount rate, and of course the actual cash flow.Part of investing is coming up with your own assessment of the company’s future performance, so try the calculation for yourself and check your own assumptions.The discounted cash flow (DCF) model does not take into account possible cyclical fluctuations of the industry or the future capital requirements of a company, so it does not give a complete picture of its potential performance.
Since we’re looking at PayPal Holdings as potential shareholders, the cost of equity is used as a discount rate rather than the cost of capital (or weighted average cost of capital, WACC), which represents debt.We have used 6.5% in this calculation, which is based on a boosted beta of 1.047.
Although the discounted cash flow calculation is importantIt shouldn’t be the only metric you look at when searching for a company. Overall, our assessment appears to be in line with some of the more conservative price targets we’ve mentioned by analysts.
However, keep in mind that the DCF model is not an ideal tool for stock valuation.Instead, the discounted cash flow model is best used to test certain assumptions and theories to see if they will lead to a company being undervalued or overvalued.If the company grows at a different rate, or if the cost of equity or risk-free rate changes sharply, the output may look very different.
For PayPal Holdings, we’ve rounded up threeBasisWaysYou should consider:
future profitsHow does PYPL’s growth rate compare to its peers and the broader market? Dive into the analyst consensus number for the coming years by interacting with Free Analyst Growth Forecast Chart.
note. The Simply Wall St app performs a discounted cash flow assessment for each NASDAQGS share each day. If you want to find other stock account, search here.
Simply put, Wall Street Analyst Stjepan Kalinic and Simply Wall St do not have any position in any of the mentioned companies. This article is general in nature. We provide comments based only on historical data and analyst expectations 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 shares and does not take into account your objectives or financial situation. We aim to provide you with focused, long-term analysis driven by essential data. Note that our analysis may not include the company’s most recent price-sensitive ads or quality materials.