Warren Buffett and his team at Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) have a lot of money sitting around right now, around $152 billion to be exact. While they could use this money for an acquisition, they also may purchase shares in a few companies if they believe the investment opportunity was right.
That got me thinking, "What might Berkshire be buying shares in?" After looking at what stocks fit the bill of what Berkshire typically invests in, digital payments company PayPal (NASDAQ: PYPL) came to mind.
So why might Buffett and company be buying PayPal shares?
PayPal fits right into the Buffett investment model
Berkshire has always loved financial companies and owns shares in many fintechs. With Berkshire owning shares in three of the four major U.S. credit card companies and Brazilian fintech StoneCo, it's no stranger to this industry.
The tollbooth model that PayPal deploys (taking a small chunk of each transaction) is one that Buffett has publically spoken in favor of, and it aligns with other investments within the portfolio. PayPal also has a strong brand name, an asset that cannot be easily valued, and is an X-factor for other Buffett investments like Coca-Cola.
But perhaps the biggest selling point of PayPal stock to Warren Buffett is the thing he's known best for: buying cheap.
While PayPal hasn't always been an affordable stock, market sentiment has shifted against the company, and the stock has been beaten down. While shares of many companies have enjoyed a strong 2023, PayPal stock is down more than 20%.
However, after looking at its latest quarter, the stock action and the financials don't mesh.
PayPal's stock is almost too cheap to ignore
While PayPal isn't the growth machine it once was, it's still posting respectable gains, with revenue rising 8% in Q3 and payment volume increasing 13% on a currency-neutral basis. While earnings did fall, this decline was expected, and earnings per share (EPS) are forecast to increase significantly in Q4.
PayPal also has a new chief executive officer who is laser-focused on efficiency. In PayPal's Q3 conference call, CEO Alex Chriss spoke multiple times about his desire for PayPal to become more efficient, something Buffett would applaud. This will be a positive boost for PayPal's profitability, but the stock is still looking cheap.
At about 17 times trailing earnings, PayPal is already significantly cheaper than the S&P 500 (25 times trailing earnings). Additionally, 11 times forward earnings is unbelievably cheap for a company with revenue and earnings still rising at a respectable rate. With Wall Street expects PayPal to increase EPS by 12% next year, PayPal's earnings are projected to grow faster than the market, meaning PayPal is still technically a growth stock while trading in value territory.
That's a rare combination, and it's something that Buffett's team at Berkshire Hathaway may be attracted to.
But regardless of whether they're buying PayPal stock or not, I think it's one that investors (especially ones who follow the Buffett philosophy) should consider. PayPal checks many of the boxes (toll booth, financial, cheap, and a decent brand name) that Buffett looks for, and with the stock been down by low expectations, I think it looks like a strong buy right here.
10 stocks we like better than PayPal
When our analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
They just revealed what they believe are the ten best stocks for investors to buy right now... and PayPal wasn't one of them! That's right -- they think these 10 stocks are even better buys.
*Stock Advisor returns as of November 6, 2023
Keithen Drury has positions in PayPal. The Motley Fool has positions in and recommends Berkshire Hathaway, PayPal, and StoneCo. The Motley Fool recommends the following options: long January 2024 $47.50 calls on Coca-Cola and short December 2023 $67.50 puts on PayPal. The Motley Fool has a disclosure policy.