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PayPal Stock: Bull vs. Bear

By Keithen Drury and Jeff Santoro – Dec 31, 2021 at 8:05AM

Key Points

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The bears have been right about PayPal in 2021, but what about 2022?

As the world shifts to digital payments, PayPal (PYPL -0.82%) is looking to capture as many consumers as it can. It operates a lucrative business model by taking a slice of every transaction processed. After rising 116% during 2020, it has lost nearly 20% this year.

PayPal has been plagued by rumors and slowing growth, but does the recent sell-off raise red flags or provide investors a buying opportunity? Two contributors give their take on PayPal's investment prospects.

Woman checking finances on app.

Image source: Getty Images. 

Bullish take: Customers are using PayPal more

Keithen Drury: A PayPal investment is a bet on its ecosystem becoming consumers' preferred way to pay. Users can manage their bills, buy and sell crypto, earn rewards, and pay for goods on PayPal. It also has a buy now, pay later segment that saw a 400% usage increase during Black Friday this year. Venmo, PayPal's popular peer-to-peer payment platform, recently inked a deal with Amazon to accept it at checkouts beginning in 2022. This is a huge development for PayPal, as PayPal itself is not accepted on Amazon.

PayPal has evidence that consumers are using its platforms more. The average user made 44.2 payments over a 12-month period, an increase of 4.1 payments versus last year. Overall, 4.9 billion net transactions were completed in the third quarter against 4 billion a year ago. Look for these numbers to continue their trend as PayPal accomplishes its mission.

The pandemic was a huge tailwind for PayPal, but it created tough customer growth comparisons as the company added 13.3 million net new active accounts during the third quarter versus 15.2 million in 2020. However, its total payment volume was up 24% to $310 billion, showing increased usage. Revenue was only up 13%, but PayPal was more efficient with expenses as free cash flow was up 20%. With almost $20 billion in cash, short-term, and long-term investments, and $8.9 billion in debt, PayPal will be able to expand operations as it sees fit by using its balance sheet.

Valuation is at a historical low, as the stock has seldom traded with a price-to-earnings ratio below 50 over the last four years.

PYPL PE Ratio Chart

PYPL PE Ratio data by YCharts

Considering PayPal's valuation is below where it was throughout most of the pandemic, investors can get in with little valuation risk. As PayPal's earnings increase -- management projects 19% non-GAAP earnings growth during all of 2021 -- the stock should follow suit. Throughout 2022, PayPal will have more favorable comparisons and should regain its status as a fundamental growth stock. Watch for new agreements and transaction growth to judge PayPal's execution. Given PayPal is off nearly 40% from its all-time highs, now appears to be a great time to purchase the stock.

Bearish take: High price for slowing growth

Jeff Santoro: There's no doubting PayPal's success over the past several years. Its impact on the financial space has challenged incumbents like Mastercard and Visa and inspired competitors like Block, formerly known as Square. Although, slowing growth combined with a lofty valuation has made PayPal less enticing as an investment moving forward.

The past few quarters tell the story of a company with slowing growth. After posting year-over-year revenue growth of 31% in the first quarter of 2021, the next two quarters saw that metric decrease to 19% and 13%. In absolute dollars, revenue has also remained relatively flat for all of 2021, growing only 1% in the first nine months of the year. The story is the same for the bottom line, with net income falling 31% year to date.  Turning to user growth, we see similar trends. In the first nine months of 2020, PayPal added 56.7 million new accounts. Over the same period of time in 2021 only 39.2 million new accounts were created, a 31% decrease. These results should give investors pause and are worth keeping an eye on to see if the trends reverse.

Some of these criticisms may seem unfair. After all, this is a relatively short time frame to be looking for trends. However, it's important for investors to be aware that this slowing growth has come at a time when the valuation for the company has remained comparatively high. PayPal's forward price-to-sales ratio of 9 is more than twice that of Block's, which is 4. Management also said that the current quarter's growth rate is lower than expected and that supply chain and labor issues may mute the holiday spending season. If the goal of owning PayPal is to beat the market, there may be better places to invest right now.

Whether PayPal's stock price returns to its high or remains depressed is anyone's guess; good arguments can be made for either side. PayPal's fall has garnered plenty of media attention, which could cause swift sentiment changes with the stock depending on what type of coverage is received. In any case, PayPal's 2022 results should give investors some clarity. 

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jeff Santoro owns Amazon, Block, Inc., and PayPal Holdings. Keithen Drury owns Mastercard, PayPal Holdings, and Visa. The Motley Fool owns and recommends Amazon, Block, Inc., Mastercard, PayPal Holdings, and Visa. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon, long January 2022 $75 calls on PayPal Holdings, and short January 2022 $1,940 calls on Amazon. The Motley Fool has a disclosure policy.

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