PayPal's (PYPL -1.47%) stock price has declined more than 70% since it touched its all-time high in July 2021. The digital payments giant lost its luster as its growth cooled off and margins declined. Rising interest rates have intensified pressure on the company by curbing consumer spending and driving investors away from higher-growth tech stocks.

But with such a steep pullback behind it, is PayPal finally worth buying again ahead of its third-quarter report on Nov. 3? Let's review the bull and bear cases for this polarizing fintech stock.

A shopper makes a payment with a smartphone.

Image source: Getty Images.

What the bears will tell you about PayPal

Those who take the bearish view on PayPal believe that the company failed to adequately prepare for three major headwinds: the loss of eBay's (EBAY -2.91%) business to smaller rival Adyen (ADYE.Y -1.54%) from 2018 through 2021; the inevitable slowdown in digital transactions as people reverted to their pre-pandemic shopping habits and e-commerce sales cooled off; and the impact of rampant inflation on consumer spending.

Instead, PayPal overpromised and underdelivered. In February 2021, management declared it could nearly double its active accounts from 377 million in 2020 to 750 million in 2025. But in February 2022, it abandoned that ambitious goal because its growth in accounts was clearly plateauing.

Metric

Q2 2022

Q1 2022

Q4 2021

Q3 2021

Q2 2021

Active Accounts

429 million

429 million

426 million

416 million

403 million

Growth (YOY)

6%

9%

13%

15%

16%

Data source: PayPal. YOY = year over year.

That stagnation helps explain why last October it was reported that PayPal was interested in buying the social media company Pinterest (PINS 0.65%), which hosted 433 million monthly active users in the second quarter. Talks between the two companies fizzled out, but the fact that they took place suggests PayPal was so starved for growth that it was willing to buy Pinterest just to reach 750 million accounts.

PayPal's decelerating growth in total transactions and total payment volume over the past year also indicates its core business is losing its momentum and that it's struggling to replace the revenues it lost when eBay stopped using it as its primary payments platform.

Metric

Q2 2022

Q1 2022

Q4 2021

Q3 2021

Q2 2021

Transactions Growth (YOY)

16%

18%

21%

22%

27%

Total Payment Volume Growth (YOY)

13%

15%

23%

24%

36%

Data source: PayPal. YOY = year over year.

The departure of longtime CFO John Rainey in May raised more red flags, and so did its expansion into the wobbly "buy now, pay later" (BNPL) niche, which primarily doles out subprime microloans to consumers who can't get approved for traditional credit cards.

Its recent proposal to fine individual account holders $2,500 per infraction for using the platform to spread "misinformation" -- a policy change it hastily walked back, saying that it was published in error -- also raised troubling questions about PayPal's neutrality as a digital payments platform.

As its growth in users and payments dried up over the past year, PayPal's operating margins declined sharply. Part of that margin compression can be attributed to difficult year-over-year comparisons to 2021, when its results benefited from its release of credit reserves. However, some of that margin compression was also caused by its investments in its digital wallet, e-commerce, cryptocurrency, and BNPL services.

Metric

Q2 2022

Q1 2022

Q4 2021

Q3 2021

Q2 2021

Revenue Growth (YOY)

10%

8%

13%

13%

17%

Adjusted Operating Margin

19.1%

20.7%

21.8%

23.8%

26.5%

Data source: PayPal. YOY = year over year.

Analysts expect PayPal's revenue to rise by just 10% to $27.9 billion this year, compared to its 18% growth in 2021, and forecast that its adjusted earnings per share will decline by 15% as it absorbs those higher costs.

What the bulls will tell you about PayPal

Those who take a bullish view on PayPal will admit that it faces a lot of near-term challenges, but they expect it to increase its revenue per active account to offset its slowing growth in total accounts. PayPal plans to achieve that by expanding its platform into a "super-app" that seamlessly links its digital wallet, e-commerce services, BNPL features, crypto trading tools, and peer-to-peer payments via Venmo.

Venmo's strong growth offset the slower growth of PayPal's namesake services last quarter. Venmo served 90 million active accounts at the end of Q2, compared to its 52 million at the end of 2019, and it could widen the company's moat against Block's (SQ -0.34%) Cash App for peer-to-peer payments and other financial services.

PayPal's growth will also likely accelerate again after it fully decouples from eBay, which only accounted for 2.5% of PayPal's revenue in its latest quarter. It also expects its operating margins to start expanding in the fourth quarter of 2022 and throughout 2023 as it streamlines its business and focuses on expanding its "highest conviction growth opportunities" in checkout services, digital wallets, and its Braintree back-end software (which competes against Adyen).

PayPal's growth will likely decelerate this year, but analysts still expect its revenue and adjusted earnings per share to grow by 14% and 22%, respectively, in 2023 after it laps its near-term challenges. The board also authorized a new $15 billion stock buyback, which supports the notion that PayPal shares -- which currently trade at just 19 times forward earnings -- are undervalued.

Which argument makes more sense?

PayPal's longer-term prospects seem bright, but I simply can't trust a company that had to walk back its own guidance and whose management has made such baffling business decisions over the past year. I might be more optimistic if PayPal actually stabilizes its user growth and expands its margins again. But until that happens, I'll stick with more promising tech stocks instead.