Is Weakness In PayPal Holdings, Inc. (NASDAQ:PYPL) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

Simply Wall St

October 30, 2022 at 8:02 AM·4 min read

It is hard to get excited after looking at PayPal Holdings' (NASDAQ:PYPL) recent performance, when its stock has declined 2.8% over the past month. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on PayPal Holdings' ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for PayPal Holdings

How To Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for PayPal Holdings is:

10% = US$2.1b ÷ US$20b (Based on the trailing twelve months to June 2022).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.10 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

PayPal Holdings' Earnings Growth And 10% ROE

At first glance, PayPal Holdings seems to have a decent ROE. Even so, when compared with the average industry ROE of 16%, we aren't very excited. Although, we can see that PayPal Holdings saw a modest net income growth of 20% over the past five years. So, there might be other aspects that are positively influencing earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio. Bear in mind, the company does have a respectable level of ROE. It is just that the industry ROE is higher. So this also provides some context to the earnings growth seen by the company.

We then compared PayPal Holdings' net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 14% in the same period.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Has the market priced in the future outlook for PYPL? You can find out in our latest intrinsic value infographic research report.

Is PayPal Holdings Efficiently Re-investing Its Profits?

PayPal Holdings doesn't pay any dividend, meaning that all of its profits are being reinvested in the business, which explains the fair bit of earnings growth the company has seen.

Summary

On the whole, we feel that PayPal Holdings' performance has been quite good. Specifically, we like that it has been reinvesting a high portion of its profits at a moderate rate of return, resulting in earnings expansion. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here

Yahoo News
As Sandy Hook survivors graduate from high school, the Newtown community reflects on a 'bittersweet' milestone
The graduation ceremony at Newtown High School will include a moment of silence for the victims of the Dec. 14, 2012, mass shooting, who would have been receiving their diplomas.
Associated Press
WeWork has emerged from bankruptcy. What's next for the co-working office space provider?
WeWork has officially emerged from bankruptcy. Once a Wall Street darling promising to revolutionize the world of work, WeWork took a stunning — but anticipated — fall last November when it filed for Chapter 11 bankruptcy protection. Early overexpansion shackled WeWork with mounting debt and unsustainable real estate costs, and the New York-based company turned to restructuring in a bid to resurrect its business.
NBC News
Federal Reserve leaves key interest rate unchanged amid signs inflation is starting to slow further
The Federal Reserve said Wednesday it was keeping its key interest rate unchanged as it fights elevated inflation rates that have been pinching U.S. businesses and consumers.
TODAY
What's the healthiest chocolate? The No. 1 pick, according to dietitians
Dark chocolate is the healthiest chocolate because it has the most cocoa, and contains less sugar than milk chocolate. It may benefit the heart and brain.
TODAY
The best tarot spreads for beginners, according to an expert
What are the best tarot spreads? What are tarot spreads for beginners? What are ideas for three card tarot spreads?
TODAY
39 summer salads recipes for warm weather spreads
Make salad the star of the show this summer.
Reuters
Chipmaker Broadcom raises annual revenue forecast, unveils stock split
Shares of the Palo Alto, California-based company, which also unveiled a stock split, rose more than 9% in extended trading. The company will carry out a 10-for-1 forward stock split, effective after markets close on July 12, with split adjusted trading beginning on July 15. Broadcom's shares have rallied more than 30% so far this year, after almost doubling in 2023, as investors bet heavily on chip stocks, anticipating towering gains at the back of generative AI technology.
Associated Press
Legal advocates seek public access to court records about abuse at California women's prison
Two advocacy groups on Wednesday asked a judge to unseal court records and preserve public access to hearings in the class action lawsuit against the federal Bureau of Prisons over the sexual abuse of incarcerated women at a now-shuttered California prison. The bureau announced suddenly on April 15 that it would close FCI Dublin and transfer about 600 women despite attempts to reform the facility after an Associated Press investigation exposed rampant staff-on-inmate assaults.
CBS News
Nonprofit offers Indian women cash, insurance to deal with extreme heat
More than 100 people have died in India in the past month because of heat strokes and other heat-related causes.
USA TODAY
Remember the northern lights last month? See how that solar storm impacted Mars’ surface
The same storm that gave us a view of the northern lights last month also delivered a healthy dose of radiation to Mars' surface.
Politico
North Carolina GOP pushes bill that could boost controversial nominee for governor
The Republican-controlled legislature altered state campaign finance law. Democrats are crying foul.
CNN
Arizona man indicted on federal firearms charges for allegedly planning attack targeting Black people at Atlanta concert
An Arizona man was indicted by a federal grand jury this week on several firearms charges, having been accused by the US Justice Department of planning a mass shooting targeting Black people and other minorities at a May Atlanta concert in hopes of inciting a race war before the upcoming presidential election.
Yahoo Finance
Stock market today: S&P 500, Nasdaq soar to fresh records after inflation cools and Fed sees improving outlook
After a cooler-than-expected inflation reading on consumer price increases in May, investors are turning focus to the Federal Reserve decision at 2 p.m. ET.
CNN
Bus passengers frantically texted loved ones as gunman hijacked an Atlanta commuter bus during rush hour
a gunman had hijacked a commuter bus with 17 people inside, prompting passengers to frantically text loved ones and call 911 for help, police said.
TODAY
91 Father's Day jokes that prove you inherited Dad's funny bone
Give your dad a good laugh with these funny Father's Day jokes, cheesy puns and hilarious one-liners.
AFP
Argentine police pepper spray protesters opposed to Milei reforms
Argentine police used pepper spray Wednesday on demonstrators outside Congress, where lawmakers debated a swath of liberalizing reforms proposed by budget-slashing President Javier Milei.At least 40 people were treated at the scene after being pepper sprayed, the Association Against Institutional Violence, a non-governmental organization, told AFP. Moreau denounced police "repression."
USA TODAY
Is there life out there? NASA latest spacewalk takes fresh approach
Scientists hope Thursday's spacewalk will tell them if future experiments on Mars are at risk of contamination from bacteria humans carry.
Associated Press
UCLA names new chancellor as campus is still reeling from protests over Israel-Hamas war
The president of the University of Miami was chosen Wednesday to become the next chancellor of the University of California, Los Angeles, where the retiring incumbent leaves a campus roiled by protests over Israel’s war against Hamas in Gaza. Dr. Julio Frenk, a Mexico City-born global public health researcher, was selected by regents of the University of California system at a meeting on the UCLA campus, where there were a swarm of security officers. Frenk will succeed Gene Block, who has been chancellor for 17 years and announced his planned retirement long before UCLA became a national flashpoint for U.S. campus protests.
Reuters
Two dozen companies working to find bird flu vaccine for cows, US agriculture secretary says
Twenty-four companies are working to develop an avian flu vaccine for cattle, as the virus spreads among U.S. dairy herds, Agriculture Secretary Tom Vilsack told Reuters on Wednesday. Bird flu has infected 90 dairy herds across 12 states since late March, according to the U.S. Department of Agriculture (USDA). A vaccine could curb the risk of bird flu spreading to new species and lessen potential economic losses for dairy farmers, but may take years to develop.
Reuters
Hunter Biden trial isn't changing US voters' minds, Reuters/Ipsos poll finds
Most U.S. voters followed the criminal trial of President Joe Biden's son Hunter Biden and the vast majority say his conviction won't affect their vote in the Nov. 5 election, according to a Reuters/Ipsos poll that closed on Tuesday. Some 67% of registered voters in the two-day poll said they had heard at least a fair amount about the trial of Hunter Biden, who on Monday was convicted on charges of lying about his drug use to buy a gun. Republican presidential candidate Donald Trump's conviction last month on charges of trying to cover up a hush money payment to porn star Stormy Daniels carried somewhat more weight in voters' minds, with just 61% saying it would have no impact on their decision.