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QuestionsCategory: Financials QuadrantGood time to buy Paypal?
Theodore Tan asked 3 weeks ago

Hi FP,
Paypal reported slower earnings growth in Q3 but is still on an upward trend.
Moreover one of the directors did insider buying at USD 205 recently for around 9000 shares.
I have priced
Fair valuation at USD 261 based on TTM prices
Prices at 1 std down to be USD 195 based on TTM prices
 
Is this correct?
 
Thank you!
 

4 Answers
Victor Chng answered 2 weeks ago

Hi Theodore, 
 
I have not been following the development of Paypal. You may want to answer the following questions below so I can get a better understanding in order to guide you:
 
1.What caused the recent slow in earnings?
2.Is the fundamental still intact despite the slow in growth?
3.Does Paypal still have runway for it to grow?
4.What is the average PE and 1STD PE that you are using?

Theodore Tan replied 2 weeks ago

Hi Victor,

1) Seems there is a slow down in earnings growth.
https://www.morningstar.com/stocks/xnas/pypl/quote

2) Yes, fundamental seem intact. According to morningstar, EPS, OCF, Revenues are all growing based on TTM.
3) With Square as a competitor and other Fintechs, it seems like it have a lot of competition. However Paypal manage to buy over the shares of Gopay (30% bought over)
https://www.reuters.com/article/us-china-paypal-stake-idUSKBN29J0IC

4) oh sorry I forgot to attach the excel.
I am using 5 years average PE ratio of 62.93.
After taking into account STD of 15.75

I estimated
Fair valuation (based on 2020 EPS) = 62.93*3.54 = USD 222
Valuation (Less 1 STD, based on 2020 EPS) = (62.93-15.75)*3.54 = USD167

Valuation (Less 1 STD, based on TTM EPS) = (62.93-15.75)*4.16 = USD 196

I will send my excel sheet to fifth person email.
Appreciate if you have any further inputs on Paypal!
Thank you!

Victor Chng answered 2 weeks ago

Hi Theodore,

Good job and keep up the good work. :)

The valuation is indeed attractive and slow growth may be temporary.

When I ask about fundamental intact is not based on their past growth of EPS, OCF or Revenue but rather do you see more competition coming up that may erode their earnings or market share significantly. If you think that Paypal is able to maintain their position in the next 5-10 years then the current valuation is really worth considering.
 
 

Victor Chng answered 2 weeks ago

Hi Theodore,

Did you adjusted your TTM EPS by excluding exceptional items like fair value gain?

I just realised that Paypal have a huge amount of fair value gain in their income statement. If you removed it, I don’t think the valuation will be as attractive as you had mentioned.

Theodore Tan replied 2 weeks ago

Hi Victor, nope i don’t know what’s that haha. I tried to find fair value gain on the income statement but was not able to find anything similar.
Mind guiding me?

Thanks!

Victor Chng answered 2 weeks ago

Hi Theodore,
 
Your TTM EPS of $4.16 is derived from the sum of 4Q2020 earnings and 9M2021 earnings which will work out to be $4,935m.
 
Referring to 9M2021 results, in page 5, you can see this items called “Other income (expense), net”. Search this keyword, you will end up on page 19 where they breakdown the “Other income (expense), net”. You will notice that there is a net gains on strategic investments of $336m (9M2021) and $973m (9M2020). These are one-off item that you need to remove from your TTM earnings. As mentioned that TTM is the sum of 4Q2020 and 9M2021, now you need to retrieve the 4Q2021 exceptional item. 
 
Go to FY2020 annual report, search for keyword “Other income (expense), net” and you will reach page 85. At page 85, you can see that the “Net gains on strategic investments” for FY2020 is $1914m. Take $1,914 minus $973m and you will get your 4Q2020 “Net gains on strategic investments” of $941m
 
TTM “Net gains on strategic investments” will be $336m (9M2021) plus $941m (4Q2020) which work out to be $1,277m. After deducting your exceptional item of $1,277m from $4,935m, your TTM earnings should be $3,658m. Hence, your TTM EPS should be a lower figure instead of $4.16.
 
Hope this helps :)

Victor Chng replied 2 weeks ago

Do note that it is best not to take the TTM EPS from financial data sources as the final figures because they don’t adjust for exceptional items. Do remember to check for exceptional item before taking the TTM EPS from face value.

Theodore Tan replied 2 weeks ago

Hi Victor,

Thanks for guidance. Learn a lesson. Looks like market did not realise this exceptional item.
Is there a book that I can refer to for learning such unique situations?

Thanks!

Victor Chng replied 2 weeks ago

Hi Theodore,

I don’t think there is a book that teach about unique situation.

You can just create a habit to look out for exceptional items before using the EPS and you can avoid most situations already.