PayPal Holdings (PYPL 2.90%) is still building on top of robust growth from earlier in the pandemic, and it's in the early stages of what is expected to a huge opportunity. It's the leader in its industry, and it's profitable.
So why are investors so down on it? PayPal stock is down almost 80% from its high two years ago, and it's even trading below its value five years ago, even though revenue and profits have increased considerably since that time.
Data source: YCharts
What gives? Let's see whether this presents an opportunity or a value trap.
The dominant player in a growing industry
PayPal is the leader in digital payments. It works on both sides of the equation, providing merchant services such as payment processing and point-of-sale devices, and individual consumer accounts for users to buy items and send money to peers digitally. This is a powerful business model, and as digital payments accelerated during the pandemic, PayPal posted some of its best results ever.
It continues to upgrade its platform and add services, often by acquiring other companies. Much of its growth right now is coming from Braintree, a merchant payments platform, which PayPal acquired in 2013.
The digital landscape is huge right now, and it's only growing. The pandemic accelerated what would have been many years of incremental growth compressed into a short amount of time, so growth rates are slowing, but they're still rising. According to Statista, e-commerce sales are expected to increase 10.4% this year. PayPal is used in many of these transactions.
Market pressure and competition
Inflation and the sluggish macroeconomy have combined with a post-pandemic slowdown in growth of digital transactions. In the 2023 first quarter, total payment volume (TPV) increased 10% over last year, while revenue rose 9%.
In response, Paypal began a program to streamline costs as growth rates started to decelerate last year. As a result, earnings per share (EPS) increased from $0.43 last year to $0.70 this year in the first quarter. Management raised the full-year EPS forecast based on this better-than-expected performance.
Besides the general macro environment, PayPal is facing competition from new and advanced fintech companies. There is a slew of companies that offer all sorts of digital financial technology that have started up over the past few years, offering services like buy now, pay later, customizable credit cards, and low-fee transactions. Many of these smaller companies get acquired by larger ones, such as Block, which bought buy now, pay later company Afterpay last year.
PayPal has bought its share of tech-based companies, and it also matches competitive technology, such as releasing its own buy now, pay later services. As the dominant fintech, it's the one to beat. That dominance gives it an edge. For example, it can offer more than merchant services, since it has a enormous user base of 433 million active accounts. It can offer PayPal check out on its millions of merchant websites, making it easier for users to complete purchases, something its smaller competition can't do.
Another piece to add the mix
Earlier this year, Chief Executive Officer Dan Shulman said that he's stepping down. PayPal stock will likely remain depressed until a successor is announced, and market reaction will depend on who's taking over.
This could be a huge opportunity for the company. Although there's plenty of gas left in PayPal's tank, the market is pricing it as if its best days are past. The right CEO could reinvigorate the company with new direction and inspire renewed confidence in the stock.
So far, management hasn't given any updates about who the new CEO will be. Shulman said he's staying on through the end of the year, so an announcement should be coming up.
This stock could be a bargain
Considering PayPal's dominance, continued growth, and future potential, it looks like the market has soured on PayPal more than it deserves. The stock is trading at less than 29 times trailing-12-month earnings, or a little more than half of its five-year average.
Data sources: YCharts
PayPal stock looks like a bargain at this price, and investors should consider buying shares, especially since a new CEO announcement should lift the stock.
