The market is beginning to show some fragility as it loses some of its hard-earned value from earlier this year. The S&P 500 index had been up close to 20% for the year at the end of July, but now it's up 16%.
Many stocks have soared this year, and valuations have increased along with prices, making it harder to find deals in this market. PayPal's (PYPL 2.90%) stock hasn't been finding favor with investors this year, and it's down 12% in 2023. Should you stay away too? Or is this an opportunity?
What's everyone worried about?
At first glance, PayPal looks like it's doing pretty well from a business standpoint. Revenue continues to grow every quarter, including a 7% year-over-year increase in 2023's second quarter to $7.3 billion. Operating income rose 48% to $1.1 billion, and earnings per share (EPS) were back in the positive at $0.92 compared to a $0.29 loss last year.
EPS is expected to decline year over year in the third quarter, though, and the company is still doing work it started two years ago to cut costs and bolster productivity. Taking out one-time additions from last year, EPS is expected to be about flat.
PayPal continues to upgrade its platform and introduce new features and services, such as tap-to-pay for merchants with Venmo accounts to accept multiple forms of contactless, digital payments with their phones. PayPal has 400 million customer accounts and more than 30 million merchant accounts, and it offers myriad services for both segments that run the gamut of payment processing, digital wallets, investing, lending, and more.
Are concerns out of hand?
There are a few reasons investors are concerned despite the solid performance and improving profits. One is new competition. Digital payments used to be PayPal's arena, with few competitors. But as e-commerce has soared and is now a daily routine, more companies are looking for a piece of the pie. Many companies, from new competitors to large companies broadening into fintech like Alphabet's Google, are offering their own versions of digital payments.
In my opinion, this is more a sign of the overall health of the industry and not a worry, so long as PayPal is keeping up and protecting its business, which it is. It's very hard to displace an incumbent. I'm not saying it's impossible, but PayPal is way ahead of competitors in terms of how much volume it processes, how many merchants it works with, and how many partnerships it has. It's doing a great job of keeping its dominant spot, and the more people turn to digital forms of payment, the more PayPal wins.
Another concern is that active accounts are shrinking, from 435 million at the end of 2022 to 431 million at the end of the second quarter. In its efforts to cut costs and leverage its resources properly, it has changed focus to generating more activity from active accounts at the expense of minimally engaged accounts. This might be an excellent strategy, and so far, it looks like it's achieving management's aims. But it's something to keep an eye on, and it should eventually move the other way.
Finally, the economy is slowing for retail in general, and that's how PayPal makes money. This is an external headwind that should blow over and turn into a tailwind when inflation gets under control and people begin to spend more freely.
Is PayPal stock a buy?
Turning back to the original question, PayPal's valuation looks attractive. The stock trades at 17 times trailing-12-month earnings, which looks very reasonable considering its increasing sales, strong profits, and cash generation. It's also just about its cheapest ever, and making me think I should be buying some shares instead of writing this article.
I see a long and profitable future ahead for PayPal, but the stock may go sideways until the economy shapes up. If you have a long enough time horizon, now looks like a good time to buy.
