Motley Fool: Digital dollars

Shares of Paypal Holdings (Nasdaq: PYPL), the leading digital payments platform, were recently down 30% from their 52-week high and more than 75% from their all-time high in 2021. This presents an intriguing opportunity for long-term investors.

Businesses beginning to return to normal have slowed e-commerce and digital spending. PayPal has also been losing market share to Apple Pay. The state of the global economy and the threat of a recession around much of the world aren’t helping, either.

Despite those headwinds, PayPal still managed to grow revenue by 9% (on a currency-neutral basis) year over year in its fourth quarter. Total payment volume was also up 9% on a currency-neutral basis, to $357.4 billion.

Adjusted earnings per share, or EPS, fell 10% in 2022 but management plans to turn that around in 2023 via cost-cutting. It’s forecasting 18% growth in adjusted EPS. The company is also planning to benefit shareholders this year by spending 75% of its free cash flow to buy back shares.

Paypal Holdings encompasses not just the PayPal platform but also Venmo, Zettle, Xoom, Hyperwallet, Honey and Paidy. Its stock seems undervalued at recent levels and well worth consideration – but if you invest, plan on following its progress. (The Motley Fool owns shares of and has recommended PayPal.)

Ask the Fool

Q. I’m thinking of investing in a company that has filed for bankruptcy. Should that be a deal breaker? – D.C., Richmond, California

A. In most cases, bankruptcy proceedings are a huge red flag and a definite deal breaker. That’s because if and when a company emerges from bankruptcy protection, the common stock of its shareholders is typically canceled and made worthless. (If it issues new shares, they won’t be given to former shareholders.) If you think the company can perform well post-bankruptcy, wait and make sure first.

Q. What are LEAPS? – S.L., Dallas

A. Long-term equity anticipation securities (LEAPS) are long-term options. A regular option gives you the right to buy (via “call” options) or sell (via “put” options) a fixed number of shares of a security at a fixed price within a fixed time period, which is typically a few months. LEAPS feature expiration dates that can be several years away.

Let’s say you think that Acme Explosives Co. (ticker: KBOOM), trading at $30 per share today, will be trading at $50 or more in a year or two. You might buy call options for $10 per share that let you buy the shares at $20 at any time before January 17, 2025. A set of 100 such LEAPS would cost you $1,000, which is a lot less than the $3,000 it would cost you to buy 100 shares of the stock today. If the shares appreciate as expected, you’ll profit. But if they don’t do so before the option expires, you’ll have lost your $1,000.

Options are best avoided by new investors and even seasoned ones can do very well without them. Learn more about LEAPS in our handy reference nook, Fool.com/terms.

My smartest investment

My smartest investment move has been ignoring dumb advice. Many years ago, I was advised to never buy a stock with a price-to-earnings, or P/E, ratio above 20. Even dumber, I read somewhere that if you only have $1,000 to invest, it’s not worth doing so.

I went ahead and bought shares of Microsoft at a P/E ratio higher than 20 and more than quintupled my money. – A.J., Kingwood, West Virginia

The Fool responds: A key thing to know about P/E ratios is that they tend to vary widely by industry. Fast-growing or capital-light businesses (such as software or internet specialists) often have relatively high P/Es, while capital-intensive or slower-growing companies (such as railroads or automakers) often have lower ones. Remember, too, that the P/E is simply the current stock price divided by the last 12 months’ earnings per share. If a good company has a bad year, earnings-wise, its P/E ratio will be steep for a while.

It’s even more irrational to think that $1,000 isn’t worth investing. If it grew at an annual average of 8% over 25 years, it would become nearly $6,850. If you happened to invest it in one or more strong performers that averaged annual growth of 12%, it would become $17,000. Invest $1,000 or more regularly, and you can build quite a war chest for retirement.