After registering tremendous growth as a direct result of the coronavirus pandemic, PayPal's (PYPL -2.00%) business dealt with a huge slowdown in 2022 as consumers reverted to more normal behavior and the macroeconomic picture weakened. Investors soured on the stock, sending shares down a whopping 62% in 2022.
However, the pessimism might be overblown. In fact, there are still 1.36 trillion reasons that investors should love PayPal stock. Let's take a closer look.
A dominating force in digital payments
In 2022, the fintech leader reported that it processed an incredible $1.36 trillion in total payment volume (TPV), up from $1.25 trillion in 2021 and $936 billion in 2020. This figure measures the entire dollar value of all the transactions that occur on PayPal's network, and it demonstrates the company's continued dominance in electronic payments.
Macroeconomic headwinds have rightfully been a top-of-mind concern for the management team, as well as analysts, throughout the past year. Inflationary pressures and higher interest rates are a headwind for consumer spending, especially for discretionary items, the source of most of PayPal's transactions. Moreover, the ongoing threat of a recession will certainly dissuade shoppers, particularly those on the lower end of the economic spectrum, from spending on unnecessary things.
This unfavorable situation is worsened by the normalization of e-commerce spending trends after the pandemic-fueled boom. Online shopping experienced a major surge when everyone was stuck at home, but with more people spending at physical stores, e-commerce has taken a hit. Online shopping's share of retail spending in the U.S. was at 14.7% in the last quarter of 2022, down from 16.4% in Q2 2020.
Coming out of this year and going into 2024, the company believes e-commerce growth "probably reverts back to double digits," said Chief Executive Officer Dan Schulman on the Q4 2022 earnings call, voicing his optimism. He believes that because inflation is cooling, discretionary spending will bounce back. Schulman also cited China's rebound from strict COVID lockdown measures offering a boost in the near term.
Despite these macroeconomic headwinds, PayPal has continued to perform well. Revenue and free cash flow increased 8% and 4%, respectively, in 2022 from a year earlier. And the business now has 435 million active accounts, a gargantuan sum that was up 2% over 2021. Seeing PayPal continue to post gains was welcome news for shareholders.
But again, it all goes back to TPV on PayPal's network, which is probably the biggest factor driving the company's success. Investors obviously want to see this number climbing higher because it means that usage is rising. Over the trailing-12-month period, the average active account transacted 51.4 times on the platform, up from 45.4 in the year-ago period. Recent developments, such allowing Amazon customers to check out with their Venmo balances and integrating PayPal- and Venmo-branded credit cards with Apple Wallet, support even more growth in the years ahead because they expand the ways that accounts can use the company's various services.
Should investors buy the stock?
With the stock falling out of favor with investors, down 28% in the past year (as of this writing), shares are currently trading at a price-to-earnings (P/E) ratio of 37. This compares quite favorably to PayPal's historical valuation. Since being spun off from eBay in July 2015, PayPal's P/E has averaged 51, a steep price to pay no doubt. The current valuation provides prospective investors with some downside protection, and it's hard to see the stock getting much cheaper anytime soon thanks to negative sentiment being largely behind us.
Wall Street seems very optimistic about PayPal's prospects. Average analyst estimates call for revenue and earnings per share to increase at a compound annual rate of 8.3% and 24.2%, respectively, between 2022 and 2026. The potential for heightened future financial performance can push the stock price higher.
If you're looking for a fintech stock to add to your portfolio, you can do much worse than PayPal. This digital payments trailblazer is well positioned to benefit from the secular shift toward a cashless economy.
