Is PayPal Stock a Buy Now?

Many investors once considered PayPal (PYPL -0.91%) to be a stable blue chip play on the secular expansion of the digital payments market. Yet its stock has pulled back about 80% after hitting a record high of $308.53 on July 23, 2021. That decline was largely driven by concerns about its slowing growth, macro challenges, and overheated valuations.

But has PayPal's steep sell-off actually created an attractive entry point for long-term investors who can ride out the near-term volatility? Let's review this fintech leader's recent challenges, stabilization strategies, and valuations to decide.

Image source: PayPal.

Reviewing PayPal's recent challenges

PayPal was spun off from eBay (NASDAQ: EBAY) in 2015, but it initially remained the online marketplace's main payment processing platform. That all changed in early 2018 when eBay announced it would gradually phase out PayPal's services and transition to the Dutch digital payments platform Adyen (OTC: ADYE.Y) by 2023.

The unexpected loss of eBay's customers cast a pall over the stock, but the pandemic temporarily masked that slowdown as more consumers relied on digital payments for contactless online purchases. As a result, PayPal's revenue and adjusted earnings per share (EPS) rose 21% and 31%, respectively, in 2020.

In early 2021, management boldly predicted that between 2020 and 2025, it could nearly double its number of active accounts from 377 million in 2020 to 750 million, while more than doubling its annual revenue to over $50 billion, and more than doubling its annual free cash flow (FCF) from $5 billion to over $10 billion. But here's what happened since it made those bullish forecasts.

Data source: PayPal. YOY = year-over-year.

PayPal hastily abandoned its goal of reaching 750 million active accounts in early 2022, and it will also likely miss its revenue and FCF targets for 2025 by a mile. It mainly blamed that slowdown on the macro headwinds, but its final decoupling from eBay and competition from similar services -- including Adyen, Block's (SQ -1.23%) Square seller services and Cash App, Apple Pay, Alphabet's Google Pay, and Stripe -- could be exacerbating that pressure.

PayPal expects its revenue to rise 6.5% to 7% year over year in the second quarter, while analysts anticipate 8% growth for the full year. That outlook suggests its business is gradually stabilizing after weathering some tough headwinds over the past year. It expects its annual FCF to decline slightly to approximately $5 billion for the full year.

During the first-quarter conference call, acting chief financial officer Gabrielle Rabinovitch said that assuming current macro conditions continue, PayPal expects its "back-half revenue growth to be roughly in line with our performance in the first half of the year."

Reviewing PayPal's priorities

As PayPal's growth cools, it's cutting costs and boosting its buybacks. The company laid off about 7% of its workforce earlier this year and plans to repurchase roughly $4 billion in shares throughout 2023. Those efforts lifted its adjusted operating margin by 201 basis points year over year to 22.7% in the first quarter of 2023, but that metric remains far below its 2020 and 2021 levels. On the bright side, its adjusted EPS continues to climb as it ramps up buybacks.

Data source: PayPal.

PayPal expects its adjusted EPS to grow 24% to 26% year over year in the second quarter of 2023, and to rise about 20% for the full year. Based on its current price of $62, its stock looks historically cheap at less than 13 times this year's earnings.

Adyen, which is growing a lot faster than PayPal, trades at about 60 times forward earnings. Block, which is also growing at a faster clip than PayPal and is more tightly tethered to Bitcoin, has a forward price-to-earnings ratio of 34.

But can we really consider PayPal to be a value stock?

PayPal might seem like value stock relative to its peers. And it offers some balanced exposure to more-speculative fintech markets like peer-to-peer payments (through Venmo) and buy now, pay later services (through its Pay in 4 options). But the company's high-growth days also seem to be over, and it could struggle to expand as digital payments become more commoditized and seamlessly integrated into operating systems like iOS and Android.

The upcoming departure of CEO Dan Schulman, who was appointed to lead PayPal prior to its split with eBay, also raises troubling questions about its longer-term growth strategies. I believe PayPal's downside potential could be limited by its low valuations, but I wouldn't buy it as a turnaround play when so many other high-quality stocks are still on sale.