It hasn't been fun being a PayPal (PYPL 2.90%) shareholder lately. As of this writing, the stock price is down 20% from where it traded five years ago. That terrible performance pales in comparison to the Nasdaq Composite index, which is up 76% over that same time span.
PayPal's stock is also trading about 77% below its all-time high set back in mid-2021. And it's even down 3% this year, not participating at all in the broader market's rally since the start of 2023. This is surprising given that there are a lot of attractive qualities about this business.
Is PayPal's stock a buy right now? Here are four reasons that say the answer to that question is a resounding "Yes!"
PayPal has competitive advantages
Legendary investor Warren Buffett looks for companies that have competitive advantages, or traits that allow companies to perform better than their rivals, before choosing to invest. It's helpful to use this same evaluation framework when looking at PayPal.
The fintech's most prominent competitive advantage comes from its network effects. With 398 million consumer accounts and 35 million merchant accounts (as of March 31) on the platform, PayPal operates a two-sided network that becomes more valuable to its user base the larger it gets. Merchants want to use PayPal because there are a vast number of potential customers plugged in, and vice versa. Starting a digital payments network like this from the ground up would be extremely difficult and extremely expensive and couldn't be done quickly by potential new upstarts.
Then there's PayPal's strong brand recognition. The company is known for providing seamless, comprehensive, and secure payments solutions across the globe. Because it has been around for more than two decades, it has developed the technological know-how needed to be a leader in the industry.
PayPal has outstanding financials
At scale, payments companies are generally extremely lucrative. Just look at Visa and Mastercard, which both carry operating margins north of 50%. PayPal isn't quite on this level when it comes to profitability, but its numbers are still impressive.
Over the last five years, PayPal's gross margin and operating margin averaged 54% and 16%, respectively. And the company is a major producer of free cash flow (FCF). After generating $5.1 billion of FCF in 2022, management believes PayPal can produce $5 billion this year. A lot of this cash will be redirected toward repurchasing outstanding stock, a great use of capital given that shares trade at a cheap forward price-to-earnings multiple of just 13.6.
There are strong trends in the industry
Despite macroeconomic headwinds hurting PayPal's growth potential, the company still processed a whopping $355 billion in total payment volume (TPV) in the first three months of 2023. That figure was up 10% year over year. During a time when consumer confidence is at historic lows and discretionary spending is pressured due to elevated inflation, it's encouraging to see PayPal's TPV rise at a healthy clip.
Zooming in, PayPal's transactions per active account (TPA) continue to climb, up 13% year over year in Q1. More than a year ago, CEO Dan Schulman highlighted that the company was shifting its strategy away from trying to grow active accounts to one focused on driving more engagement. It seems to be working as indicated by TPA trends.
A change in leadership
It was announced in February that Schulman would be stepping down as CEO at the end of this year to focus on "passions outside the workplace." He was in the top role at PayPal since 2014, before the business was spun off from eBay. So clearly, this is a huge event in the company's history.
Schulman's most notable fiasco came when he predicted that PayPal would be able to double its revenue and user base between 2020 and 2025. He has since revised those projections, taking back these lofty targets following the post-pandemic lull for the business.
While a CEO change can certainly be a worrying time for investors, it might be exactly what PayPal needs. This could be an important transition point for the company, going from full-on growth mode to now focusing on optimizing its operations, controlling costs, and prioritizing its financials and FCF. This could be a boon for the stock.
