Is PayPal Stock a Buy?
While the overall market had a remarkable bounce-back year in 2023, it was a different story for PayPal (PYPL -0.57%). The payments giant saw its share price plummet 13% last year, as market sentiment around the company remains weak amid slower growth and leadership changes.
Nonetheless, some investors might think the beaten-down shares present an opportunity. Is it time to buy this fintech stock? Let’s take a closer look.
PayPal is waiting on a stronger economy
PayPal’s business got a big boost early on in the coronavirus pandemic, which boosted many other internet companies as well. Total payment volume (TPV), revenue, and active accounts were soaring in 2020 and 2021, leading to a rising stock price. However, economic headwinds, namely inflationary pressures and higher interest rates, stunted growth throughout 2022 and into 2023. In the third quarter of 2023 (ended Sept. 30), PayPal posted an 8.4% year-over-year revenue gain, which fell far short of the 20%-plus growth it regularly saw in 2020.
Softer macroeconomic conditions negatively impact consumer discretionary spending, which is what PayPal specializes in. The good news, though, is that a stronger economic backdrop can be a huge boon for this business. And this is likely what shareholders are hoping for in 2024.
If the Federal Reserve cuts rates multiple times this year, consumer confidence and spending could improve. And PayPal’s growth metrics could accelerate, which should help to boost the stock price.
That’s not to say that the numbers have been terrible. PayPal’s TPV of $388 billion in Q3 was up 15% year over year, a healthy rate of growth, no doubt. Moreover, transactions per active account increased 13% year over year. This shows that users are engaging even more with the payment service, a positive sign.
Extremely cheap valuation
As of this writing, PayPal’s stock price sits a whopping 80% below its all-time high from July 2021, a troubling development. Naturally, the shares are trading at a cheap valuation. They sell for a forward price-to-earnings ratio of just 11. This represents about a 50% discount to where the S&P 500 trades.
That cheap price tag might have some investors thinking this stock is a value trap. However, I believe this is a wrong assumption to make. Let’s see what that low P/E gets you.
For starters, PayPal is a competitively advantaged business. There’s no denying this. The company has been at the forefront of the digital payments revolution for more than two decades, and it has developed massive scale, wide acceptance, and powerful network effects that help protect it from rivals. With 35 million merchants and 393 million consumers, PayPal’s service becomes more valuable to all stakeholders the larger it gets.
Plus, the PayPal name is recognized globally as a trusted, secure, and seamless way to move money around. As commerce continues to transcend borders, this company is in a good position to benefit.
I’ll also point to PayPal’s data advantage. By serving both merchants and individuals, as opposed to just one of these customer groups, the business is able to collect valuable insights about spending behaviors and patterns that can help minimize fraud and improve authorization rates. In the digital age, this gives PayPal the upper hand compared to subscale payments networks.
Despite these positive attributes, it’s accurate to say that PayPal shares are characterized by low expectations and even a pessimistic tone based on the current valuation. But this is still a good business with solid prospects, making it a smart portfolio addition right now.
Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends PayPal. The Motley Fool recommends the following options: short March 2024 $67.50 calls on PayPal. The Motley Fool has a disclosure policy.