Shares of PayPal (PYPL 2.90%) are trading for 76% less than the peak price they reached nearly two years ago. But that doesn't necessarily make it a smart stock to buy. The stock is down because the payment processor's earnings also declined from their previous peak.
Even experienced investors can sometimes forget that no matter how far a stock has already fallen, it can keep falling until it reaches zero. If PayPal's earnings start contracting again, investors who buy the stock now, at what looks like a bargain price could still suffer significant losses.
Let's take a quick look at how well PayPal's underlying business is performing to see if the stock market is responding rationally to the company's earnings contraction.
Why PayPal stock is down
Back in early 2021, PayPal's business was experiencing unbelievable growth rates in light of COVID-19-related lockdowns that made it a lot harder to exchange funds in person. Management boldly predicted the number of active PayPal and Venmo accounts on its platform would reach a combined 750 million by 2025.
To reach 750 million it would have had to nearly double the number of active accounts and that prediction turned out to be too optimistic. At the end of this March, there were 433 million active accounts on its platform, a 1% gain year over year.
A lack of booming account growth isn't the only disappointment PayPal investors have suffered since the stock peaked in 2021. Earnings that spiked during COVID-related lockdowns briefly fell into negative territory last year.
PYPL Net Income (Quarterly) data by YCharts
Earnings nearly returned to growth In the third quarter of last year. Unfortunately, PayPal's bottom line fell sequentially in the fourth quarter of 2022 and the first quarter of this year.
Why PayPal looks like a bargain now
At the moment, you can buy PayPal shares for just 15 times management's earnings estimate for 2023. At this valuation, investors can come out ahead over the long run even if earnings grow at a low single-digit percentage. And PayPal isn't growing at a low single-digit percentage. Second-quarter revenue is expected to climb about 8% year over year at constant currency exchange rates, and adjusted earnings for all of 2023 are expected to climb 20% year over year.
The company's long-term user growth estimate was way off, but this company's shorter-term earnings and revenue estimates tend to outperform expectations.
Image source: Getty Images.
Competitive advantage
To some, PayPal may seem like a dinosaur in relation to all the scrappy fintech start-ups it has to compete with. Look a little closer, though, and you can see it's well-positioned for future growth.
PayPal is the only fintech with a thriving payment service for merchants that is just as popular with consumers. For this reason, it's a lot easier for PayPal to launch new network services, such as buy now, pay later, than a payments processor unfamiliar to most consumers, like Stripe.
PayPal investors will want to keep one eye on Block and its efforts to bring Square merchants and Cash App-using consumers together under a single, well-recognized umbrella.
I haven't seen PayPal boast about how many active Venmo users it had since the second quarter of 2022, when it reached 90 million. Not long ago, Block told investors that Cash App finished March with 53 million monthly active users. This was 4% more than it had last December. PayPal stopped reporting Venmo active users separately but we know that total active accounts on the platform was 433 million in the first quarter, down from 435 million at the end of 2022.
Things look good
PayPal's active user base isn't growing as quickly as was expected a couple of years ago, but users already on the platform are using it more and more. First-quarter payment transactions rose 13% year over year and total payment volume rose 12% once adjusted for shifting currency exchange rates.
A huge base of consumers and businesses already familiar with PayPal is a big advantage that will likely allow for steady growth in the years to come. Buying this stock now and holding it for the long run looks like the right move.
