Things haven't looked good for PayPal (PYPL 1.96%) lately. After being spun off from eBay in July 2015, the stock skyrocketed 740% to reach its all-time high of $308.53 on July 23, 2021. Since then, however, shares are down a whopping 76% (as of this writing). Macro headwinds have led to a business slowdown, as well as waning investor enthusiasm.
So is this leading fintech stock a buy right now? Let's take a closer look.
Closing out 2022
PayPal's revenue increased 8.5% in 2022 to $27.5 billion. Adjusted earnings per share of $4.13 were down from the $4.60 it posted in 2021 due to compressed margins. These financial results were a far cry from the gains that shareholders have been used to seeing over the years. Also making headlines was the announcement that CEO Dan Schulman will be retiring at the end of this year.
What's attractive about PayPal from an investment standpoint is that this company generates lots of free cash flow (FCF). Because capital expenditures are minimal, averaging 3.4% of overall annual revenue over the past three years, cumulative FCF over the past 36 months totaled $17.8 billion. This has allowed the business to repurchase its shares. In 2023, management plans to use 75% of FCF to buy back its stock.
Managing to post revenue and FCF growth was impressive given the headwinds PayPal has been facing. The year-over-year comparisons to 2021 were difficult, as that year was still being boosted by pandemic-related effects when online shopping was surging. As we've seen in 2022, however, this consumer behavior is normalizing. Management mentioned that discretionary spending will remain under pressure.
Moreover, the elevated inflation we've been experiencing in the U.S. doesn't help the cause. Consumers have been paying more for necessities, which makes it less likely they will have sizable disposable income set aside to buy nice-to-have items.
"Inflationary pressures have affected discretionary consumer spending and post-COVID spending patterns are still evolving," CFO Gabrielle Rabinovitch said on the Q4 2022 earnings call. "As a result, we're not providing guidance for full-year revenue growth at this time."
Nonetheless, PayPal is still a dominant force in the world of digital payments. Last year, the company processed $1.36 trillion in total payment volume (TPV), nearly double the $712 billion it reported in pre-pandemic 2019. This amount puts it in the same ballpark as American Express, which processed $1.6 trillion in payment volume in 2022. Plus, PayPal is the most popular digital wallet: It is accepted as a method of payment at nearly 4 out of 5 of the top 1,500 merchants in North America and Europe.
And the business now has 435 million active accounts. This is up from the total of 305 million at the end of 2019, so it's evident that PayPal has been able to hold on to its user gains in recent years. These customers are more engaged as well; the average transactions per active account of 51.4 (over the trailing 12 months) increased 13% year over year.
Solid growth prospects
Schulman previously believed that PayPal could reach 750 million active accounts by 2025. He backed down from this goal, and he now has the company focused less on user growth, and more on driving greater engagement and revenue from each account. Perhaps this is an admission that investors should temper their expectations of growth going forward.
There are still reasons to remain optimistic about PayPal's future, though. For starters, e-commerce only represents about 15% of total retail spending in the U.S. The thinking is that as online shopping continues to steal share from brick-and-mortar locations, PayPal should benefit because it is the leader in electronic payments.
Another obvious underlying secular theme that shareholders need to pay attention to is the rise of digital wallets. According to Ark Invest, there will be 5.6 billion digital wallet users globally by 2030, up from 3.2 billion today. As the most accepted digital wallet in two of the most important regions of the world (North America and Europe), PayPal is in a prime position to capture more users.
Right now, shares are trading at a price-to-earnings ratio of 36, which is well below the stock's historical average valuation. For investors looking for an industry-leading enterprise with strong profitability that is benefiting from secular trends, it's hard to ignore PayPal.
