Fintech leader PayPal Holdings (PYPL -2.62%) has come under a lot of pressure the past two years as it faces new competition and a slowing e-commerce market. However, it still dominates its industry with increasing sales and robust profitability. Wall Street hasn't been too impressed, and PayPal stock is down about 34% during the past year. However, it's climbing back, up 4% so far in 2023. Is this a deal that's right for your portfolio?
Why is PayPal on sale?
After being a growth stock for many years, PayPal's revenue growth has sharply decelerated. Granted, that's happened in the aftermath of some of its best quarters ever. It had huge growth when the pandemic forced everyone to shop online, and as the industry leader in digital payments, PayPal was a major beneficiary of that shift. It's not surprising that its growth rate has slowed.
What might be more worrisome is the general slowdown in e-commerce as inflation holds back spending, and the sheer number of new fintech companies that are challenging every side of PayPal's business. Clearly, now's the time to launch new digital-financial projects, and companies from stalwarts like Visa to younger companies like Block and newer players like Apple, whose Apple Pay app is growing in popularity.
On top of that, Chief Executive Officer Dan Schulman is leaving his post at the end of the year. The company is likely to find a suitable, and maybe even exciting, replacement. But until it makes that announcement, investors aren't likely to get too hyped up about the stock.
Everything that's going right
PayPal is still operating a competitive and compelling business, and growth is still moving in the right direction. Sales increased 7% year over year in the fourth quarter, and earnings per share (EPS) increased as well, although they declined for the full year. PayPal is still adding new customers, with 2.9 million additions in Q4 2022 for a total of 435 million, and it processed $1.36 trillion in total payment volume for the full year, 9% more than last year.
Management is focusing on cost controls, and EPS is forecast to grow from $2.09 in 2022 to $3.27 in 2023. That's still below the 2021 EPS of $3.52. The company said that 75% of its free cash flow would go toward its share-repurchase program, which tells investors that it's committed to its shareholders and that its focus this year won't be on high growth.
At that same time, PayPal has heavily invested in its business over the past two years, launching its all-in-one PayPal app and inking new deals with merchants and partners. Some of its recent projects include adding its digital-payment app Venmo to Amazon checkouts and expanding its buy now, pay later program.
What the future holds
PayPal still has a long growth runway. It's the largest business of its kind in the U.S., and as it keeps expanding, it protects that edge. Consider how many merchants accept PayPal's digital wallet compared with other digital-wallet programs.
Image source: PayPal.
PayPal is well positioned to keep adding new technology, upgrade its product line, add new customers, accounts, and merchants, and increase revenue and earnings over time.
PayPal stock is on sale, but is it cheap?
PayPal stock is trading at a valuation of almost 36 times trailing-12-month earnings. That's not incredibly cheap, but it's lower than PayPal's historic levels. That makes sense considering its growth is slowing, and its prospects, though still strong, are not quite as stellar as they were.
At these levels, PayPal looks more like a value stock than a growth stock. It certainly has a long future ahead, but it's high-growth days might be past. In the current environment, the stock is likely to go sideways, and much of the stock gains it can still crank out might only happen in the unforeseeable future. If you're looking for a stock that is likely to provide steady gains long term, and you have an extended time horizon, PayPal might be a good deal for you at this price.
