PayPal (PYPL 0.41%) shareholders haven't had a smooth ride over the past few years. Since peaking at over $300 per share in 2021, PayPal has fallen significantly to around $75. However, the stock may be a victim of past performance as it looks undervalued, especially in light of recent changes.

Still, some fundamental shifts are happening in the payment processing space, and PayPal may be playing defense. So is now a good time to open a position in PayPal's stock? Or should investors steer clear? Let's find out.

Green flag: PayPal has a new growth driver and is becoming more efficient

PayPal is one of the world's largest payment processors and has a rapidly growing brand few know about under its umbrella. Unbranded payment processing (which is primarily PayPal's Braintree credit card processing brand) now makes up about 30% of PayPal's total payment volume (TPV), essentially the same TPV share as PayPal-branded checkout. Braintree is rapidly growing, too, as its TPV rose 40% in 2022. This is a must-watch segment for investors as it could provide PayPal with its next growth engine.

PayPal slide showing TPV by segment in 2022.

Image source: PayPal.

Overall, PayPal is transitioning from a growth stock to a more mature one. With revenue only rising 7% in the fourth quarter, PayPal will need to become more efficient to deliver market-beating growth. PayPal is doing just that, with its earnings per share (EPS) rising 19% in Q4. That trend is expected to continue throughout 2023, with management guiding for EPS of $3.27 compared to $2.09 in 2022.

PayPal's efficiency improvements are starting to become apparent, which shows management is adapting to its changing business outlook.

Red flag: Management is in flux, and the brand's value is in question

Even though management has recognized it needs to transition to become more efficient, it did so too late. This may be one of the factors behind CEO Dan Schulman announcing his retirement, effective at the end of 2023. This leaves the business in a bit of a limbo state, but the time frame is long enough that the board of directors should be able to find a suitable replacement. 

It may be why some investors are hesitant to enter the stock -- they want leadership clarity before taking a position.

Another concern with the business is that unbranded processing (Braintree) and other merchant services are growing the fastest. This may indicate that the PayPal name doesn't carry any brand power, especially with PayPal branded processing only growing 5% in 2022 despite being the same size as its unbranded processing wing.

While these are relatively minor reasons, they both factor into PayPal's biggest problem: its slow revenue growth. With Wall Street analysts only projecting 6.7% and 9.1% revenue growth in 2023 and 2024, respectively, it will be difficult for PayPal to beat the market continuously.

So what should investors do with the stock?

The stock is cheaply valued

If you take a look at PayPal's historical valuation and compare it to its future price-to-earnings (P/E) ratio, it's clear most investors don't believe in PayPal's turnaround.

PYPL P/E Ratio Chart.

PYPL P/E Ratio data by YCharts.

Granted, its historical valuation was established when PayPal was putting up much higher growth rates than it is now. Still, 15 times forward earnings is relatively cheap for any stock growing earnings at greater than a 10% pace.

With PayPal at such a low valuation, it's worth considering as an investment and shouldn't be sold at these prices. However, without a clear plan for the future yet, PayPal stock will likely continue to trade sideways until a new CEO is announced or it reports a blowout quarter.

I'll continue to hold my shares here, but I wouldn't be afraid to establish a small position in the stock if you're bullish on its prospects.