How far off is PayPal Holdings Inc (NASDAQ:PYPL) from its intrinsic value? Using the most recent financial data, I am going to take a look at whether the stock is fairly priced using the discounted cash flows (DCF) model. If you want to learn more about this method, the basis for my calculations can be found in detail in the Simply Wall St analysis model. If you are reading this after November 2017 then I highly recommend you check out the latest calculation for PayPal Holdings here.

Is PYPL fairly valued?

I’ve used the 2-stage growth model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the initial phase has higher growth rates that plateau over time. Firstly, I pulled together the analyst consensus forecast of PYPL’s levered free cash flow (FCF) over the next five years and discounted these values at the cost of equity of 9.62%. This resulted in a present value of 5-year cash flow of $15,448M. Want to understand how I arrived at this number? Take a look at our detailed analysis here.

The graph above shows how PYPL’s earnings are expected to move in the future, which should give you an idea of PYPL’s outlook. Secondly, I determine the terminal value, which is the business’s cash flow after the first stage. I’ve decided to use the 10-year government bond rate of 2.8% as the stable growth rate, which is rightly below GDP growth, but more towards the conservative side. Discounting the terminal value back five years gives us a present value of $46,996M.

The total value is the sum of cash flows for the next five years and the discounted terminal value, which results in the Total Equity Value, which in this case is $62,443M. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value of $51.95, which, compared to the current share price of $77.57, we see that PayPal Holdings is quite expensive and not available at a discount at this time.

Next Steps:

Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company. What is the reason for the share price to differ from the intrinsic value? For PYPL, I’ve put together three key factors you should further examine:

PS. Simply Wall St does a DCF calculation for every US stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.

To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.