Economic uncertainty has battered the stock market this year, sparking recession fears that have driven the S&P 500 and the Nasdaq Composite into bear market territory. During that downturn, PayPal Holdings (PYPL 2.62%) has seen its share price nosedive 76%, marking its greatest loss of value since it became a public company (for the second time) in 2015.
That creates a perfect buying opportunity for patient investors. Here's why.
PayPal is the most accepted digital wallet in North America and Europe
PayPal operates a two-sided payments network with 432 million active accounts, including 397 million consumers and 35 million merchants. That scale makes the fintech company a formidable player in the digital payments space, but its ability to build relationships with merchants and consumers is also an important asset. Unlike traditional payment processors (which only form relationships with merchants), PayPal often has data from both sides of a transaction.
So what? Understanding how consumers spend money helps the company drive sales for merchants, combat fraud, and mitigate risk. For instance, loss rates on its buy now pay later (BNPL) service rank among the lowest in the industry, yet PayPal is one of the largest BNPL providers in the world. Additionally, the company can connect consumers with relevant shopping deals through its digital wallets to generate leads for businesses, and it can provide shopping insights to sellers that help them optimize their websites.
In a nutshell, the two-side nature of the platform creates material value for merchants, as evidenced by PayPal's position as the most accepted digital wallet in North America and Europe. Additionally, because the company has built trust with consumers, PayPal actually boosts conversion rates, total spend, and repeat purchases for merchants too.
That competitive edge continued to drive growth in the third quarter, though the challenging economic environment was still a headwind. Revenue climbed 11% to $6.8 billion and free cash flow jumped 37% to $1.8 billion. Better yet, Paypal is well positioned for future growth. Management puts its addressable market at $110 trillion, and Juniper Research says digital wallet users will grow 53% to 5.2 billion by 2026.
Management is executing on a solid growth strategy
Last year, PayPal set a target of 750 million active accounts by 2025, but management scraped that forecast earlier this year, choosing instead to prioritize engagement among existing users. That rattled investors, but the strategy makes sense given the difficult economic climate. PayPal can invest more aggressively in new user growth when inflation cools and consumer spending normalizes.
In the meantime, CEO Dan Schulman says investments will be focused on areas where the company has a tremendous advantage due to the scale of its two-side network. That includes the PayPal and Venmo digital wallets, PayPal checkout, and Braintree (a more customizable checkout solution for larger e-commerce businesses). Schulman also said the company would reduce its cost structure, saving $900 million this year and $1.3 billion in 2023. That will boost its operating margin by at least one percentage point next year.
Investors can already see the impact of the new growth strategy in action. PayPal reported a GAAP operating margin of 16.3% in the third quarter, its best margin in the last four quarters. Better yet, the company recently deepened its ties with Apple and Amazon. U.S. merchants will soon be able to use Apple's Tap-to-Pay technology in the PayPal and Venmo iOS apps, and U.S. consumers will be able to add PayPal- and Venmo-branded cards to their Apple Wallet next year. That could drive market share gains in physical retail, as Apple Pay is the leading mobile payment platform (i.e. in stores) in the U.S. Similarly, Venmo is now a payment option for U.S. consumers shopping on Amazon. That could drive market share gains in digital retail, as Amazon is the most-visited online marketplace in the world.
PayPal stock is trading near its cheapest valuation in history
Shares of PayPal currently trade at 3.2 times sales. That multiple is just above its all-time low of 3.1 times sales, and it's a bargain compared to the five-year average of 8.5 times sales. Put another way, PayPal is essentially trading at its cheapest valuation in history. That's why patient investors should buy a few shares of this growth stock today.
