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These 2 Stocks Are Down 75%+ From Peaks: Value Traps or Discounted Gems?

Published 06/25/2024, 03:22 AM
  • Alibaba and PayPal have failed to stage a rally despite broader market recoveries.
  • Both stocks have been hit hard, still down 70-80% from their all-time highs following the 2022 bear market.
  • The key question is whether these stocks can recover or if their best days are behind them.
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Once market darlings, Alibaba (NYSE:BABA) and PayPal (NASDAQ:PYPL) have remained grounded despite broader market recoveries.

These two stocks, heavily impacted by the 2022 bear market that followed the meme stock frenzy of 2021, are still down a staggering 70-80% from their all-time highs.

The question on every investor's mind: will these fallen giants ever recover, or is their story over?

Alibaba and PayPal Price Chart

Let's take a look at each stock individually to determine if any of the stocks are worth a bet at current levels.

Alibaba: Undervalued but Overshadowed?

Alibaba's stock price currently sits at a significant discount (56.9%) to its intrinsic value, as estimated by ten different mathematical models. However, the company has faced recent challenges, including a slowdown in revenue and profit growth.

Fair Value

Source: InvestingPro

Additionally, political uncertainties surrounding the Chinese government's control over businesses pose a difficult-to-quantify risk.

Despite these concerns, Alibaba boasts a strong balance sheet. The company's liquid assets and short-term investments can comfortably cover its current debt, and its current assets outweigh current liabilities.

Revenue Trend

Source: InvestingPro

While the stock appears undervalued, the political risk factor remains a major concern for me. Given this uncertainty, I wouldn't personally include Alibaba in my portfolio, even though it has potential for recovery at its current valuation.

Diluted EPS Trend

Source: InvestingPro

This political risk makes Alibaba a less-than-ideal choice for my portfolio, despite its potential for recovery at current valuations.

Furthermore, the company's earnings performance falls short of my quality standards, with a low ROIC (Return on Invested Capital) failing to meet expectations.

BABA Financial Metrics

Source: InvestingPro

PayPal: Discount Potential Despite Short-Term Headwinds

PayPal's stock seems significantly undervalued, affected by two main factors: competition and margin reduction. These bearish elements have weighed heavily on the stock, but the new management appears to be steering the company in the right direction.

PayPal Fair Value

Source: InvestingPro

Competition, particularly from Apple (NASDAQ:AAPL) Pay, poses a significant risk. Additionally, margin compression, primarily due to the lower conversion rates of unbranded checkouts (Braintree) compared to branded checkouts, has also impacted the stock.

However, it is important to focus on PayPal's core business: payment transaction fees. The key metric here is Total Payment Volume (TPV), which continues to grow steadily.

Revenue Trend

Source: InvestingPro

Despite the current challenges, several factors indicate a brighter future for PayPal. Innovations such as Fastlane and ADV are not yet reflected in the stock's current valuation.

Additionally, the market seems to be pricing the stock as if future cash flow growth will be nearly stagnant, which may not be the case.

Diluted EPS Trend

Source: InvestingPro

Recent data shows that revenues and EPS are beginning to recover from the 2022 decline. The stock's free cash flow (FCF) return now exceeds 10%, an attractive figure supported by an ambitious buyback plan averaging $5 billion per year.

This buyback strategy suggests that, theoretically, PayPal could repurchase the entire company in 13 years at this pace.

Investors should keep an eye on the upcoming quarterly report. While it's unrealistic to expect a quick recovery, patience and a long-term perspective (at least 2-3 years) are essential.

Buying above $300 was ill-advised, but at current levels, the stock presents a different, more promising story—provided investors exercise caution and proper money management.


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Disclaimer: This article is written for informational purposes only; it does not constitute a solicitation, offer, advice, counsel or recommendation to invest as such it is not intended to incentivize the purchase of assets in any way. I would like to remind you that any type of asset, is evaluated from multiple perspectives and is highly risky and therefore, any investment decision and the associated risk remains with the investor.

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