Why I Bought PayPal Holdings Inc (NASDAQ:PYPL)

PayPal Holdings Inc (NASDAQ:PYPL)'s outlook is one of buoyant sentiment as it continues to post exciting top-line revenue growth. I will conduct a high level fundamental analysis on the company by looking at its past financials and growth prospects moving forward.

Firstly, a quick intro on the company - PayPal Holdings, Inc. operates as a technology platform company that enables digital and mobile payments on behalf of consumers and merchants worldwide. Founded in 1998, it currently operates in United States at a market cap of US$91.74B.

There's no doubt PYPL is delivery on its promises, with a soaring annual revenue growth of 20.77% , and a net income growth of 28.12%. Since 2013, sales has grown 15.04%, boosted by prior years of higher capital expenditure, which most recently reached US$667.00M. PYPL has been reinvesting more into the business, leading to expected return on investment of 17.12% in the next three years, according to the consensus of broker analysts covering the stock. Net income is expected to grow to US$2.26B in the upcoming year, outpacing the industry average growth rate of 15.53%. Moreover, over the next five years, earnings are predicted to rise at an annual rate of 15.82% on average. These figures illustrate PYPL's strong track record of producing profit to its investors, with an efficient approach to reinvesting into the business, and a buoyant future compared to peers in the sector.

PYPL's financial status is a key element to determine whether or not it is a risky investment - a key aspect most investors overlook when they focus too much on growth. PayPal Holdings's balance sheet is robust, with high levels of cash generated from its core operating activities (2.53x debt) able to service its borrowings. Furthermore, PYPL's debt level is at an appropriate 6.25% of equity. It also generates income from lending its cash which, in turn, is able to cover its annual interest payment to its debtors. The company shows the ability to manage its capital requirements well, increasing my conviction of the sustainability of the business going forward. PYPL has high near term liquidity, with short term assets (cash and other liquid assets) amply covering upcoming one-year liabilities, as well as long-term commitments. A reason I like PYPL as a business is its low level of fixed assets on its balance sheet (3.75% of total assets) . When I think about the worst-case scenario in order to assess the downside, such as a downturn or bankruptcy, physical assets and inventory will be hard to liquidate and redistribute back to investors. PYPL has virtually no fixed assets, which minimizes its downside risk.

PYPL currently trades at US$76.44 per share. At 1.2 billion shares, that's a US$91.74B market cap - which is expensive, even for a company that has a 5-year cumulative average growth rate (CAGR) of 15.59% (source: analyst consensus). With an upcoming 2018 free cash flow figure of US$3.55B, the target price for PYPL is US$51.67. Therefore, the stock is trading at a premium. Also, comparing PYPL's current share price to its peers based on its industry and earnings level, it's overvalued by 111.55%, with a PE ratio of 51.23x vs. the industry average of 24.22x.

PYPL's investment thesis is a positive one. I'm attracted to the company because of its strong fundamentals - financial health, future outlook and track record. However, at its current share price, right now may not be the best time to invest. For all the charts illustrating this analysis, take a look at the Simply Wall St platform, which is where I've taken my data from.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only 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 stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.