PayPal‘S (NASDAQ:PYPL) Its share price is up 41% this year as the digital payments leader has tried to put its struggles behind it under a new CEO. Is it still worth investing in anticipation of a long recovery? Let’s take a fresh look at the business model, the most pressing challenges and the valuations to make a decision.
Do you miss the morning spoon? Breakfast news delivers it all in one fast, silly and free daily newsletter. Register for free »
PayPal owns one of the largest digital payment platforms in the world, but much of its revenue came from its former parent company, eBay. That’s why it was worrying when eBay replaced PayPal with its Dutch competitor Adyen as her payment platform of choice from 2018 to 2023.
The pandemic temporarily masked PayPal’s loss of eBay business as more consumers and businesses relied on digital payments. But growth in active accounts, total payment volume (TPV) and revenue slowed after the tailwinds disappeared. Inflation, rising interest rates and other macroeconomic headwinds to consumer spending have exacerbated the slowdown in 2023.
|
Metric |
2019 |
2020 |
2021 |
2022 |
2023 |
YTD 2024 |
|---|---|---|---|---|---|---|
|
Active account growth |
14% |
24% |
13% |
2% |
(2%) |
1% |
|
TPV growth |
23% |
31% |
33% |
9% |
13% |
11% |
|
Sales growth |
15% |
21% |
18% |
8% |
8% |
8% |
Data source: PayPal.
The biggest problem for PayPal is its inability to get more active accounts. The number of active accounts rose 1% year over year to 432 million in the third quarter of 2024, but that was well below the 750 million active accounts it once aimed to reach by 2025.
PayPal abandoned that long-term goal in early 2022 and is clearly struggling to acquire new users as it faces stiff competition from other payment platforms like Block‘s Cash App, Stripe and Apple Pay.
To offset that pressure, PayPal relied more on its Venmo peer-to-peer payment app and Braintree back-end payments platform to grow its TPV. But that’s a double-edged sword, because these two higher-growth platforms actually generate lower take rates (the percentage of each transaction they keep as revenue) than the namesake platform. As a result, PayPal’s annual transaction rate has fallen every year since its spin-off from eBay in 2015.
So looking ahead, PayPal will need to grow its average TPV per existing account if it fails to win over new consumers and businesses. Under Alex Chriss, who took over as CEO last year, it has introduced new features including the FastLane checkout service, the Smart Receipts tool and the Cash Pass rewards program. It has also expanded its proprietary ‘buy now, pay later’ platform to tackle disruptive challengers such as To confirm and Block’s Afterpay, and it is using its own PayPal USD stablecoin to enable more cross-border transactions.
These initiatives could increase the robustness of PayPal’s ecosystem, expose it to higher growth markets and increase average TPV per active account, but it has also been aggressively cutting costs to grow transaction margins – which have grown over the past two quarters have even increased sequentially. . The company has also repurchased $5.4 billion in shares over the past twelve months to boost earnings per share (EPS).
It could be difficult for PayPal to balance its investments with its cost-cutting initiatives and buybacks. But for the full year, the company expects adjusted earnings per share to grow in the high teens, while free cash flow (FCF) rises 30% to about $6 billion. It plans to return that money to its investors through buybacks worth $6 billion.
PayPal survived eBay’s loss, weathered the inflationary headwinds and still squeezed more revenue from its existing users. From 2023 to 2026, analysts expect revenue and earnings per share to grow at a compound annual growth rate of 6% and 11%, respectively. The days of high growth are certainly over, but the stock seems fairly valued at around 18 times next year’s earnings.
Yet it’s also not cheap enough to be considered a value stock. Therefore, I wouldn’t rush to buy PayPal’s stock at its current price of less than $87. Instead, I would personally buy higher growth fintech stocks instead of this aging market leader before it meets its challenges the long term overcomes.
If our analyst team has a stock tip, it could be worth listening to. After all, Stock Advisors the total average return is 908% – a market-shattering outperformance compared to 174% for the S&P 500.*
They just revealed what they believe to be the 10 best stocks for investors to buy now… and PayPal made the list, but there are nine other stocks you might be overlooking.
View the 10 stocks »
*Stock Advisor returns November 18, 2024
Leo Sun has positions at Apple. The Motley Fool holds positions in and recommends Adyen, Apple, Block, and PayPal. The Motley Fool recommends eBay and recommends the following options: January 2027 long calls of $42.50 on PayPal and short December 2024 calls of $70 on PayPal. The Motley Fool has a disclosure policy.
Should You Buy PayPal Stock While It’s Below $87? was originally published by The Motley Fool
