Trying to decide what to do with PayPal Holdings is a bit like standing at a fork in the road with equal parts excitement and hesitation. For investors, the outlook is not crystal clear, but it is far from hopeless. If you look at the recent stock moves, there has been a hint of life, with shares up 2.3% in the past week and 4.4% over the past month. Yet, that glimmer is tempered by some heavy baggage, including a year-to-date drop of 17.3% and a tough five-year tumble of nearly 65%.

There is a story and some shifting perceptions behind those numbers. Take the latest industry news, such as U.S. financial firms (PayPal included) deploying over $1.6 billion in the U.K., a move that suggests growth potential abroad. Not all headlines have been positive, however. Questions about payment security in Germany, for example, briefly dented confidence. Still, market sentiment can turn quickly, especially in a space this dynamic, and investors are watching competitors like Stripe make significant moves of their own. The mix of headline risk and opportunity means PayPal's path forward could be less gloomy than recent returns suggest.

This is where things get especially interesting for anyone weighing PayPal's future. The company has scored a 5 out of 6 on standard valuation checks, which is a strong signal it could be undervalued by several common investing yardsticks. In the next section, we will break down those valuation methods and show how they stack up for PayPal. Later, an even sharper way to assess PayPal's true worth in today's market will be revealed.

Why PayPal Holdings is lagging behind its peers

The Excess Returns valuation model examines how much profit a company generates from its invested capital above the basic required return, highlighting both efficiency and growth potential. For PayPal Holdings, this approach provides a clear view of the company’s financial performance and future prospects.

Based on the latest data, PayPal’s average Return on Equity stands at a robust 24.64%. The company’s current Book Value is $21.04 per share, while its Stable Book Value estimate, sourced from eight analysts, is slightly higher at $25.70 per share. Future earning power also appears compelling, with a Stable EPS forecast of $6.33 per share as projected by eleven analysts.

Factoring in a Cost of Equity of $2.00 per share, PayPal’s Excess Return is calculated at $4.34 per share. This strong gap between returns generated and the cost of capital is a positive signal for long-term investors and suggests the company is putting its resources to efficient use.

According to this model, the resulting intrinsic value for PayPal is $118.21 per share. At recent prices, this indicates that PayPal stock is trading at a 39.7% discount to its intrinsic value, which may point to significant upside and a strong case for undervaluation.

Result: UNDERVALUED

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for PayPal Holdings.

Our Excess Returns analysis suggests PayPal Holdings is undervalued by 39.7%. Track this in your watchlist or portfolio, or discover more undervalued stocks.

For companies generating consistent profits like PayPal Holdings, the price-to-earnings (PE) ratio serves as a widely accepted and insightful valuation tool. This metric makes it easy for investors to gauge how much they are paying for each dollar of current earnings, which is especially relevant for established, profitable businesses.

Growth expectations and risk play key roles in shaping what qualifies as a "normal" or "fair" PE ratio. Companies with higher earnings growth typically trade at higher PE multiples, while those perceived as riskier or with less certain futures may command lower multiples.

PayPal's current PE ratio stands at 14.56x. This is notably below the industry average of 16.09x and even further below the peer group average of 17.50x. On the surface, these comparisons suggest that PayPal is valued more conservatively than its competitors.

However, Simply Wall St's proprietary “Fair Ratio” offers a more tailored benchmark by factoring in PayPal’s unique growth outlook, profit margins, market capitalization, industry positioning and company-specific risks. This approach goes beyond simple comparisons to ensure the multiple reflects all the relevant characteristics for PayPal at this time. For PayPal, the Fair Ratio is calculated at 18.74x, which is meaningfully higher than its current market multiple.

This suggests that PayPal Holdings is undervalued when viewed through the lens of its Fair Ratio, offering investors a potential margin of safety at current prices.

Result: UNDERVALUED

PE ratios tell one story, but what if the real opportunity lies elsewhere? Discover companies where insiders are betting big on explosive growth.

Earlier we mentioned that there is an even better way to understand valuation. Let's introduce you to Narratives. A Narrative is simply the story you believe about a company’s future, combining your view on the business’s prospects, your estimates of its future revenue, profit margins and risks, and the fair value you believe those forecasts produce.

A Narrative connects the dots. It turns your perspective on PayPal’s business model, competition and growth drivers into a set of numbers, which then becomes your personalized fair value for the stock. With Narratives on Simply Wall St's Community page, millions of investors can see, create, and update their own valuation stories. This allows investors to compare their fair value to the market price to decide if it’s a buy, hold, or sell.

What makes Narratives powerful is that they are easy to use, update dynamically when new information (like earnings reports or news) arrives, and allow you to see how other investors interpret the same facts differently. For example, some Narrative estimates for PayPal’s fair value range from $62 (reflecting a more cautious view) to $133.95 (expecting robust growth), showing just how much your outlook can shape your investing decisions.

Do you think there's more to the story for PayPal Holdings? Create your own Narrative to let the Community know!

This article by Simply Wall St 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. Simply Wall St has no position in any stocks mentioned.

Companies discussed in this article include PYPL.

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