Tesla and Rolls-Royce are probably the most popular growth stocks in the UK right now. And that’s understandable – both have potential.
However, I’ve got my eye on another growth play right now. I think it has the potential to outperform both these names in 2024.
A forgotten growth stock
The stock is PayPal (NASDAQ: PYPL). It’s one of the largest payments companies in the world with hundreds of millions of customers across more than 200 countries.
Now, PayPal has faced some huge challenges in recent years, the main one being intense competition from Apple Pay. So how can the stock possibly outperform Tesla and Rolls-Royce this year? Well, let me explain.
Priced for zero growth
PayPal stock has been absolutely crushed over the last two years. As a result, it now trades on a rock-bottom price-to-earnings (P/E) ratio of just 12.
At that earnings multiple, it’s essentially being priced for zero growth.
However, this isn’t a company generating zero growth. This year, revenue is expected to climb to $32bn from $29.6bn (+8%). Meanwhile, earnings per share are expected to climb to $5.49 from $4.95 (+11%).
If sentiment towards the stock was to pick up, I could easily see the P/E ratio here climbing to 18, or so. That would mean a share price increase of around 50% from current levels.
Personally, I don’t think Tesla or Rolls-Royce are capable of generating that kind of gain in 2024. Both are already very expensive stocks. Tesla currently trades at 57 times this year’s earnings forecast while Rolls-Royce is at 24.
Focused on profits
Of course, there would need to be a catalyst for a valuation rerating here. But I see one. And it’s new president and CEO Alex Chriss and his strategy to reinvent the company.
In an interview with CNBC last week, Chriss – who previously worked at FinTech powerhouse Intuit (and helped deliver strong growth in the company’s Small Business segment) – made it clear that things are about to change at PayPal.
He said he’s focused on five key priorities, all centred on profitable growth. He also noted the firm will be moving away from unprofitable businesses.
Investors will get more information at the company’s ‘Innovation Day’ on 25 January.
It’s worth noting that since Chriss’s interview, the stock has already started to climb. In just a few days, it has jumped from $58 to $66. So investors are clearly taking notice.
I’m buying
Now, PayPal may not outperform Tesla and Rolls-Royce in 2024. It may not even deliver attractive returns. As I mentioned earlier, the company is facing significant challenges right now.
But I’m convinced that most of these challenges are priced into the stock. I also think that anyone who wanted to sell because of these challenges probably already has.
And at the current P/E ratio of 12, I think the risk/reward setup is attractive. So I’ve been adding to my holding here recently. I think there’s a lot of potential in 2024.
