Payment industry stocks have been among the top performers in the financial sector over the years, but two look like particularly good buys as we move into the month of September: PayPal(NASDAQ: PYPL) and Global Payments(NYSE: GPN).
Both of these growth stocks are undervalued at the moment and should provide some nice upside for investors. Here's why.
1. PayPal
The past few years have been difficult for PayPal, the granddaddy of online payment platforms. It had been flying high through the beginning of the pandemic, when social distancing efforts meant people were staying home and doing more of their shopping online, but since then, a number of factors have hurt it.
One, online activity declined from pandemic highs as restrictions were lifted, and while that might seem like an obvious trend to expect, many had thought those consumer behaviors might persist post-pandemic. Two, there are many more competitors in this space now, as new payment fintechs keep popping up to eat away at PayPal's market share. Three, the company went on an acquisition spree over the past several years that included some purchases that were perhaps unnecessary and tangential to its core business, and they just resulted in higher debt and expenses.
The company is also going through a leadership transition, as longtime CEO Dan Schulman is retiring, to be replaced by Alex Chriss, who joins from Intuit, where he was general manager of its Small Business and Self-Employed Group. Chriss will start at PayPal on Sept. 27.
The market seemed ambivalent about the board's choice of Chriss, as the stock didn't get much of a bump in the days after the announcement. But things do seem headed in the right direction, given the massive expense reductions that have gone on at PayPal since last year, with a focus on enhancing its core businesses.
While revenue growth has slowed, it was still up 7% year over year in the second quarter, while payment volume was up 11%. For the full year, revenue is expected to grow 8%, while earnings per share are projected to jump 67% to $3.49.
PayPal's market share has taken a hit, but it is still the leader in digital payments with both its PayPal platform and Venmo, and it has a great, long-established brand. It will be interesting to see how it does with this reset, but for a market leader like PayPal, its current valuation is just too compelling to ignore. It trades at a price-to-earnings (P/E) ratio of 17, down from 49 in September, and a forward P/E of 12. Further, its five-year P/E-to-growth (PEG) ratio is just 0.56 -- and anything under 1 is considered undervalued.
2. Global Payments
Global Payments is one of the largest payment processors for merchants and businesses, with some 4 million clients worldwide. It provides the technological infrastructure that allows companies to send and receive money, whether that's through debit and credit cards, store cards, electronic checks, ACH payments, money transfers, gift and loyalty cards, or other forms of digital payments.
Global Payments has been a stellar long-term performer, averaging an 18.1% annualized return over the past 10 years as of Aug. 29. It also had a strong second quarter, with revenue up 7.5% year over year to $2.5 billion and adjusted earnings per share of $2.62, up 11% year over year. Further, it raised its expectations for 2023 revenue growth to 7% to 8% and guided for adjusted EPS growth of 11% to 12% to a range of $10.35 to $10.44.
Market analysts are bullish on the stock -- the consensus price target projects a gain of about 19% over the next 12 months, based on its earnings projections and its current low valuation. While its trailing 12-month P/E ratio is 42, based on a couple of quarters when it had net losses, its forward P/E is just 12, and its PEG ratio is just 0.72 -- signaling an undervalued stock.
Both of these payment companies have faced their challenges over the past few years, but their low valuations and solid growth prospects make them stocks to consider in September.
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Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends PayPal. The Motley Fool recommends the following options: short December 2023 $67.50 puts on PayPal. The Motley Fool has a disclosure policy.
