3 Reasons PayPal Is Betting $5 Billion on Its Own Stock

In early February, PayPal (NASDAQ: PYPL) Chief Financial Officer Jamie Miller revealed that the company plans to buy back about $5 billion of its own stock in 2024. With a market cap of only $65 billion, the repurchases would represent nearly 8% of the company’s equity value.

This is a huge bet for PayPal. Now trading at a depressed valuation, buying back stock could prove a genius move. But if history is any indication, PayPal could end up rapidly destroying shareholder value.

The company has already spent $15 billion in share repurchases since going public in 2015. Most of those stock buybacks ended up destroying shareholder value given the repurchase prices were much higher than today’s valuation.

Is this time different? Here are three reasons the company is optimistic.

1. PayPal stock is clearly cheap

PayPal may have spent billions of dollars on share repurchases in the past, but 100% of those buyback programs were executed at a higher valuation than today.

When the company went public in 2015, PayPal stock traded at roughly 5 times sales. During the pandemic bull market that pushed up the share prices of nearly every tech company, PayPal stock was valued as high as 15 times sales.

Today, PayPal stock trades at an all-time low valuation of just 2.2 times sales. There are plenty of reasons for this depressed valuation. From 2015 to 2020, PayPal’s quarterly revenue growth averaged between 15% and 20%. In recent quarters, that growth rate has slowed to about 8%.

There are also concerns that the company could be underinvesting in its future. In 2020, the company spent roughly 12% of its revenue on research and development. Today, that figure is around 10%. It’s not a huge dip, but when growth begins to slow, the last thing a company can afford to do is neglect research and development efforts that can help reverse the trend.

There are more positive reasons management believes now is the time to buy back $5 billion in stock. But there’s no doubt that negative events and…