It's been nearly eight years since PayPal Holdings (PYPL 0.95%) was set loose from former parent company eBay in the summer of 2015. Since then, PayPal has beaten the performance of its former e-commerce owner, but it has lagged behind the total return (which includes reinvested dividends) of the S&P 500 index.
Data by YCharts.
Back in 2014, current CEO Dan Schulman was brought in to head up PayPal on its journey as an independent entity. PayPal is now fully divorced from eBay (a long-term payments partnership ended in 2020) and it went through a significant pandemic boom-and-bust cycle over the past few years. So Schulman's announced retirement is just the latest in a series of big changes, and it effectively marks the end of an era for this leader in digital payments. But what does it mean for PayPal's stock? Is it still a buy?
An orderly exit from PayPal leadership
Schulman's exit from the CEO position at PayPal was announced in tandem with the company's Q4 2022 earnings update. This won't be a scramble to find new leadership, though. Schulman will continue serving as CEO through the end of 2023 while headhunters look for a replacement. Schulman will also continue serving on PayPal's board of directors.
PayPal was tied at the hip to eBay when the e-commerce site brought in Schulman, formerly an executive at American Express, in 2014. The IPO happened nearly a year later in 2015. Since 2015, PayPal users' total active accounts have doubled to 435 million, and annual revenue has tripled from $9.2 billion to $27.5 billion in 2022. Suffice it to say it's been a pretty good run.
However, PayPal isn't the fast-growing enterprise it was during and prior to the pandemic. Total payment value (or TPV, a measure of how much money is being moved using PayPal, Venmo, and other subsidiary apps) increased just 9% in 2022, or 11% when excluding effects from the loss of eBay -- which has completely moved on from PayPal with its own in-house payment processing system powered by Adyen. Resulting PayPal revenue (it earns fees when certain transactions are processed using its apps) was up just 8% in 2022 to $27.5 billion.
With mid- to high-single-digit percentage revenue growth predicted for the foreseeable future, it's clear PayPal has entered a new stage in its life. It's no longer a growth stock, but rather has become a value stock candidate. A corresponding change in CEO is thus appropriate.
What's the valuation right now?
Schulman will leave PayPal in pretty good shape for an eventual successor. Cash, equivalents, and investments totaled $15.9 billion at the end of 2022, offset by debt of $10.8 billion. The company is also profitable, on both a GAAP (generally accepted accounting principles) and adjusted basis.
However, PayPal has work to do. Net income was down 42% in 2022 to just $2.4 billion, though the company has already begun reining in elevated expenses from its 2020 and 2021 boom time. Free cash flow -- my preferred profit metric for a value stock like PayPal -- for full-year 2022 was $5.1 billion, up 4.5% from 2021.
This massive ship in financial technology is beginning to turn, though. A big rebound in GAAP profitability is expected this year as PayPal will continue to benefit from cost-cutting initiatives recently put in place. And on an adjusted basis (which will more closely track free cash flow), PayPal said it expects earnings per share to grow 18% in 2023. That's far faster than the single-digit revenue increase that's expected in the year ahead.
As of this writing, PayPal shares trade for 18 times trailing-12-month free cash flow, and 16 times expected adjusted earnings per share for 2023. I expect a new CEO will be hired with the goal of balancing more gradual growth with profit margin expansion. The company also just started a stock repurchase program to begin returning excess cash to shareholders. That will be a new boost for owners of the stock going forward too, as stock buybacks boost free cash flow on a per-share basis.
Data by YCharts.
Though a change in CEO always introduces some risk, Schulman is planning his retirement at a time when I believe PayPal will greatly benefit from a fresh perspective. If value stocks are what you're after, there's a lot to like about PayPal right now after the 2022 earnings update and announced leadership change. I'm a buyer.
