Despite a promising long-term future, PayPal Holdings' (PYPL -1.14%) stock has not escaped the tech sell-off. It has lost approximately half of its value compared with its high in July.
What investors considering this stock should remember, however, is that some of the best-performing growth tech stocks in history have experienced multiple 50% declines in their history. Price volatility is the norm for strong growth stocks, not the exception.
Thus, rather than panicking over the decline, investors should look more closely to see whether PayPal's brutal stock price decline has made it a wildly undervalued investment possibility.
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The drop in PayPal stock
PayPal peaked at an intraday high of $310.16 per share on July 26. Over the last six months, investors have sold off the stock for a few reasons. It lost momentum early last year due to consumers using fintech services less often as they returned to offline shopping options.
PayPal stock has also fallen due to a broader sell-off in tech stocks that also hit archrival Block (SQ -1.68%), formerly known as Square. PayPal's current price of about $157 per share represents a 38% drop versus year-ago levels. Consequently, the price of the fintech stock has fallen to its lowest level since mid-2020.
Does PayPal still offer a compelling value proposition?
Such changes in the stock price may lead investors to reevaluate what PayPal offers to the fintech market. This inevitably leads to the comparison of social payment platforms, specifically PayPal's Venmo versus Block's alternative, Cash App. In this area, PayPal and Block compete directly.
Additionally, this competition recently extended to the buy now, pay later (BNPL) market. PayPal first offered this service in the U.S. and later acquired Japan-based Paidy for $2.7 billion. In contrast, Block entered that market by paying $29 billion for Australian BNPL company Afterpay.
However, in other areas, the competition is more indirect. Block's Square ecosystem focuses on business, emphasizing business management, money management, and banking. In contrast, the business functions within PayPal's ecosystem primarily help enterprises send and collect money digitally. It also leverages its presence in over 200 countries to manage cross-border transactions. This segment accounts for about 25% of the company's total payment volume.
But despite these features, the PayPal platform has generally taken a more consumer-oriented approach. In 2020, the company bought Honey. Honey is a coupon application that links PayPal users to discounts from more than 30,000 retailers, giving consumers an incentive to check PayPal frequently. In contrast, Cash App offers such discounts only to customers who obtain its Cash Card.
Company financials and upcoming earnings
Through such advantages and its platforms in general, PayPal generated revenue of just over $18.5 billion for the first nine months of 2021, climbing 20% over what the company reported in the first three quarters of 2020. This led to $3.4 billion in net income in the first three quarters of 2021, a 28% increase over the same period in 2020. Slower growth in operating expenses and lower income tax expenses amid discrete tax adjustments boosted profit growth.
PayPal will release its full-year 2021 numbers on Tuesday, Feb. 1. If the company meets expectations of $25.4 billion in revenue, the 18% year-over-year increase would mean a revenue increase similar to the last quarter. Still, this may concern investors since Research and Markets forecasts the global fintech industry will grow at a compound annual growth rate of 27% through 2026, significantly exceeding PayPal's current growth rate.
Nonetheless, the P/E ratio has fallen to 38, down from a high of 86 last February. It also remains cheaper than rival Block, which sells at 103 times earnings. Such a differential could draw fintech investors looking for a lower valuation amid the considerable decline in tech stocks.
Should investors consider PayPal?
Although PayPal is probably not wildly undervalued, the decline in PayPal stock has made the stock a more attractive investment, particularly compared to Block. Considering the recent 28% increase in profits, the 38 P/E ratio offers a great buying opportunity for this giant fintech stock.
Indeed, the decline in tech stocks in recent months has understandably alarmed investors. However, past sell-offs have typically given way to new growth later. With PayPal trading at a lower multiple, the more modest stock price allows investors to further profit once stock price growth resumes.
