Share prices of PayPal (PYPL 1.41%) are down 76% from all-time highs set in the summer of 2021. That stock price peak occurred about the time that the acceleration in mobile payments peaked as a result of the pandemic. Since then mobile payments remained popular, but growth slowed for PayPal. Analysts point to increased competition as a big reason why.
Block's Cash App is a popular alternative for consumers in recent years, but the biggest threat analysts are worried about now is Apple (AAPL 0.51%). PayPal is still a leader with 435 million active accounts, but Apple Pay continues to gain adoption and just introduced an important new feature that could win over more users.
Let's review the threat from Apple and whether PayPal's stock is worth buying right now.
Mounting competition
PayPal still has its size and resources. Although it will never match the deep pockets of Apple's war chest, PayPal has been around for a while. It invested more over the last decade, developing the systems and technology to win the mobile payments race. PayPal has 435 million active accounts, including the popular peer-to-peer payment service Venmo, and the service helped PayPal generate $5 billion in free cash flow on $27 billion of revenue over the trailing 12 months.
Profitability is not a problem for PayPal, but top-line growth is. The main reason the stock collapsed is that PayPal's revenue growth rate dropped from 18% in 2021 to 8% last year.
Meanwhile, Apple now has over 2 billion active devices across its customer base. That is a tremendous advantage in the iPhone maker's efforts to expand Apple Pay adoption worldwide. The Cupertino, California-based company reported a "record-breaking number of purchases made using Apple Pay globally during the holiday shopping season."
An important tool that PayPal and other companies used to gain market share at checkout is giving users the option to split purchases into interest-free payments over a period of time. Apple has been late to the party here, but in March, it finally announced Apple Pay Later in the U.S. for purchases between $50 and $1,000.
Apple's buy now, pay later could fuel its momentum and put more pressure on PayPal, which analysts are worried would make it more difficult for the latter to accelerate its revenue growth.
The advantage for Apple is that it designs hardware and software. PayPal has a nice payment app, but Apple has the integration of a nice app with the security and authentication features of iPhone's iOS, such as Touch ID when sending payment. There are all kinds of things Apple can do to make using Apple Pay a more obvious choice for users, such as sending payments with Siri voice assistant, and potentially more capabilities down the road.
The growing threat from Apple is why analysts have low expectations for PayPal's future. The stock trades at a conservative forward price-to-earnings multiple of 15.3, which is surprisingly low for a company with a great record of above-average growth. Over the last five years, PayPal's total payment volume, revenue, and free cash flow grew at 24%, 16%, and 22%, respectively, on an annualized basis.
Data by YCharts
Is PayPal worth it?
The challenge in evaluating PayPal's performance relative to competitors is that there is no reliable data that tracks market share. But there are PayPal's recent numbers of its own buy now, pay later service. In the fourth quarter, PayPal's pay later service generated a respectable $7 billion in payment volume, representing growth of 102% over the same quarter in 2021.
However, PayPal's branded checkout volumes grew only 5% in 2022, which is below the 23% growth generated in 2021. Some analysts believe that is a sign of market share losses to Apple.
But the important thing is that PayPal's branded checkout volume is growing in line with the broader e-commerce market. This suggests that PayPal is maintaining its market share in a growing market, where mobile payments across the board are taking share from credit card swiping.
PayPal has its own advantages over Apple Pay and Cash App. These simplified payment apps don't offer the wide variety of services and features that PayPal does. In addition to payment capabilities, PayPal offers bill payment, savings, international remittances, shopping rewards, and stock and crypto trading.
Management is also focused on improving the customer experience with artificial intelligence and on keeping operating costs down to drive profitable growth.
As PayPal moves through 2023, the year-over-year growth comparisons will get easier. First-quarter guidance calls for revenue to be up 9% on a constant-currency basis, with adjusted earnings per share up between 23% and 25% year over year.
Based on this outlook, I would give the company the benefit of the doubt. The stock's low valuation makes it an attractive contrarian investment ahead of the inevitable recovery in the e-commerce market.
