PAYPAL (PYPL) FAIR VALUE CALCULATION

April 12, 2021 0 By bullheadedbear

Welcome to the BULL HEADED BEAR fair value & return on investment calculations for PayPal Holdings Inc. (PYPL).

This is a process I use to help me invest in companies at a fair price but also with a strong long term return. I have split this analysis into the below sections:

CURRENT PRICE VALUATIONS
10 YR FUTURE PRICE VALUATIONS
INTERNAL RATE OF RETURN ANALYSIS

BULL HEADED BEAR CONCLUSION

These models use historical financial data and forecasts as well as my personal assumptions & expectations. They do not consider company, market or economic events. Please ensure you read the full disclaimer and disclosure at the bottom of this post. This is not investment advice, always do your own research before investing.

CURRENT PRICE VALUATION MODELS:

The below prices come from personally developed models using a combination of historical financials, analysts projections and my own assumptions. I use Finbox financial models to challenge my own assumptions and valuations but do not count them in my weighted average price.

MODELFORECASTSPRICEWEIGHT
DCF – Discounted Cash FlowAnalysts$179.7150%
DCF – Discounted Cash FlowBull Headed Bear$160.1250%
FINBOX FAIR VALUE$227.230%
WEIGHTED AVERAGE PRICE$169.92

BHB FAIR VALUE = $169.92

As you can see from above the Bull Headed Bear fair value is lower than the Finbox fair value. This is due to different assumptions and expectations used in the models. There are slight variations in expected market returns, beta and perpetual growth rates which impact the results. Finbox also have more models contributing to their fair value. This is why it is always important to do your own analysis based on your assumptions and expectations.

10YR FUTURE PRICE VALUATIONS MODELS:

The below prices come from personally developed models using a combination of historical financials, analysts projections and my own assumptions.

MODELFORECASTPRICEWEIGHT
EV\EBITDA MULTIPLEAnalysts$561.5425%
EV\EBITDA MULTIPLEBull Headed Bear$550.8025%
FCF GROWTHAnalysts$767.0325%
FCF GROWTHBull Headed Bear$898.7425%
WEIGHTED AVERAGE PRICE$694.53

BHB 10YR VALUATION = $694.53

As usual the valuations using the analysts forecasts are higher than the Bull Headed Bear forecasts. This is due to me generally having more conservative expectations. However, this provides me with a valuation that has a margin of safety pre-built in to the models.

The 10 year valuation is significantly higher than the current stock price ($265 – 12.04.21) and so there is potential for good returns.

INTERNAL RATE OF RETURN (IRR)

Here we try to understand the rate of return we could receive by using the 10 year valuation vs the current price and other potential support and resistance zones.

TradingView Chart of PayPal

The below table shows IRR for the current price and the surrounding support & resistance zones.

PRICE ZONEPRICEIRR
UPPER PRICE ZONE 1$30912.9%
CURRENT PRICE ZONE$26515.1%
LOWER PRICE ZONE 1$24516.2%
LOWER PRICE ZONE 2$22817.3%
LOWER PRICE ZONE 3$21618.1%
LOWER PRICE ZONE 4$20518.9%
LOWER PRICE ZONE 5$17521.4%
LOWER PRICE ZONE 6$12427.2%

The above table shows us that buying PayPal at the current price of $265 has the potential to return an average of 15% per annum if we hold for a 10 period. Even it we bought the stock at its previous all time high of $309, you could potentially receive a return of 13%.

You can see from the above chart that PayPal’s stock price has more than doubled in the last 12 months primarily helped by the pandemic. If the price does pull back to August 2020 levels there could be opportunities for over 20% IRR.

BULL HEADED BEAR BUY CONCLUSION

According to the Bull Headed Bear analysis PayPal Holdings Inc. is currently overvalued at $265. The calculations are showing a current fair value of around $170. Due to the strong growth projections you are paying a premium now for the companies potential future valuation.

Buying at todays price ($265 – 12.04.2021) could potentially deliver a 15% return. However, due to the price being up over 100% in the last 12 months I am reluctant to buy here. $228 has been a previous support level that has been tested 4 times this year already. Purchasing at $228 would provide a potential annual return of 17.3%. In 2020 the PayPal stock price was stuck in a range between $175 and $205, testing both areas several times. Although it would require a significant drop to get to back down to these levels – it is not unthinkable.

For the Bull Headed Bear Portfolio I will add PayPal to the watch list with a maximum buy price of $228. I will potentially open a small position at $228 with the hope to add to the position at $205. If the price did manage to get down to $175 I would consider significantly increasing my position.

I will set an initial alert at $240 for me to initiate some deeper analysis on the business to confirm the potential buy at $228.

VALUATION & RETURN SERIES

See below for other posts in this series, or visit the FUNDAMENTAL ANALYSIS page for even more posts:

DISCLAIMER:

All opinions and assumptions made are my own and should not be viewed as investment advice. All investments involve risk and investors can get back less than they invested. I am not a financial advisor and your investments are solely your own responsibility. It is critical you do your own research and come to your own conclusions. These models are based primarily on historical and forecasted financials available March 2021. Business, market & economic events, and sentiment can change at any time. Bull Headed Bear has the right to right to change opinions and assumptions at any time.

DISCLOSURE:

PayPal Holdings Inc. (PYPL) is not a current holding in the BULL HEADED BEAR portfolio. There are no plans to open a position in the next 7 days. PayPal Holdings Inc. (PYPL) has been added to the watchlist and a position may be opened if the target price is reached and the risk vs reward is appropriate.