This fintech company is expected to grow at an annual rate of 27% over the next five years.
PayPal Holdings, Inc. (PYPL)
From DRIP Investor
To be sure, there is really no way to completely insulate an equity portfolio from the ravages of inflation. If inflation continues to run at 6% or more, it will present a substantial headwind for the stock market.
However, I think there are certain approaches investors can take to help dampen some of the impact of inflation on their stock portfolios.
Employee productivity is obviously an important factor in running a successful business. However, it is vital that you have productive employees during periods of rising wages. Indeed, low employee productivity against a backdrop of higher employee wages is a recipe for profit margin compression, lower profits, and a lower stock price.
One way to measure employee productivity is by looking at a simple metric— revenue per employee. To compute this metric, simply take trailing 12-month revenue and divide by employee count. (Companies often report employee numbers in financial filings. Also, the web site—CSIMarket.com—is an excellent source for revenue-per-employee numbers.)
Revenue per employee gives you a nice snapshot of the amount of staffing required to generate revenues, and how productive that staffing is. High revenue-per-employee companies will have a greater cushion to raise wages without wage inflation dramatically impacting profit margins. Also, by examining revenue-per-employee numbers across industries, it is easier to see which
industries will face more headwinds from wage inflation.
I’ve been a big booster of PayPal in these pages, but the stock has not performed well. These shares are down some 48% from their 52-week high of more than $310 per share. High P-E
stocks have been hit especially hard as a result of inflation fears. PayPal now trades at 31 times expected 2022 earnings—not a bargain basement valuation but reasonable for a company with its long-term growth profile.
I don’t know if this is the bottom in PayPal. But it is a level that certainly gets my attention for at
least some nibbling on these shares. The fact that the firm’s revenue-per-employee numbers are roughly three times its industry provides some solace as to the company’s ability to mitigate wage inflation.
Charles B. Carlson, CFA, DRIP Investor, dripinvestor.com, 800-233-5922, February 2022