After crushing the market for two years after the pandemic began in March 2020, PayPal Holdings' (PYPL 2.90%) stock price has fallen back to earth in dramatic fashion.
The fintech was a big winner when transactions migrated online amid the pandemic. However, when economies reopened, money began to flow back into services and entertainment and slowed down online, forcing PayPal to reconsider its lofty long-term growth goals.
Since peaking in mid-2021, PayPal's stock price has plummeted by over 75%, going from one of the hottest growth stocks to a deeply discounted value stock in under a year. While PayPal may not see the blistering growth rate it did just a couple of years ago, the fintech stock is ridiculously cheap and is worth buying today. Here's why.
PayPal's dramatic repricing
PayPal was a huge winner during the pandemic, as travel and entertainment spending came to a grinding halt, and more consumers turned online to buy things. From 2020 to 2021, PayPal added 122 million new accounts, grew revenue by 43%, and surpassed $1 trillion in total payment volume for the first time.
In February 2021, CEO Dan Schulman set lofty expectations for the company, including doubling its active accounts by 2025 to 750 million and doubling revenue and free cash flow. However, trends changed for the fintech, which revised its annual earnings expectations multiple times last year, resulting in a drastic repricing of the company.
After its earnings fell 41% from 2021, PayPal's stock trades at a price-to-earnings (P/E) ratio of 35.5, which is on the lower end of its historical average since going public in 2015. Looking forward, PayPal trades at a dirt-cheap valuation of 13.1, based on analysts' expected earnings per share of $5.64 in 2023.
PYPL PE Ratio data by YCharts. PE ratio = price-to-earnings ratio.
Things are looking up for the fintech
PayPal finished 2022 with its revenue growing by 8%, while its bottom-line net income was down 42%. The second quarter marked a low-water point for the fintech when it posted its first net loss since 2014.
One thing that changed the trajectory for PayPal was activist investor Elliot Investment Management, which took a $2 billion stake to help turn things around. One of its first measures was to cut costs and focus only on high-conviction, high-margin opportunities.
Since then, it has returned to profitability. In the fourth quarter, its revenue and earnings jumped 7% and 19%, respectively, from the year before.
It has also shifted its focus from growing customer accounts to increasing the transactions per active account (TPA). So while active account growth was just 2% in the fourth quarter, the company's TPA was up 13% -- a positive sign that its plan to increase activity among users is working.
Image source: PayPal Holdings. TPA = transactions per active account.
This tailwind makes the fintech a no-brainer at today's prices
Another thing working in PayPal's favor is its top position as the most accepted digital wallet in North America and Europe. Among the 1,500 largest retailers in those regions, 79% accept PayPal's digital wallet -- a much higher acceptance rate than Apple Pay and Alphabet's Google Pay.
Image source: PayPal Holdings.
According to a study by Juniper Research, digital wallet users are expected to exceed 5.2 billion globally in 2026, a 53% growth from 2022. These shifting consumer behaviors should serve as another tailwind for the fintech's long-term growth.
PayPal is turning things around, and its long-term growth prospects and cheap valuation make it an exciting stock to buy today.
