PayPal (PYPL 2.90%) is a leading company in the world of digital payments with 435 million active accounts on its platform. Last year, it processed an incredible $1.36 trillion of payment volume. But this is a business that's going to be tied with the health and overall growth of not just the U.S. economy, but countries all around the world. And with inflation and economic concerns weighing on investors over the past year, it's not surprising that this hasn't been a hot stock to own -- it's down 39% in the past 12 months.
Despite the bearish outlook, however, this is still a solid, profitable business. Below, I'll look at how PayPal has been performing as of late, how it may do in the future, and whether or not it's a good growth stock for investors to consider at its current valuation.
Sales are growing but at a slower rate
In the company's most recent earnings report, for the period ending June 30, PayPal's net revenue of $7.3 billion was up 7% year over year. But that's at a much slower rate than in previous quarters:
PYPL Revenue (Quarterly YoY Growth) data by YCharts
It's a trend that could continue as the economy still isn't in great shape. While consumers are busy spending right now, a reckoning could soon be coming as student loan repayments resume later this year, and household debt is now at a record $17 trillion.
That means there could be a tightening in consumer spending in future periods as bills start to pile up and PayPal's growth rate could slide even more as that happens. Forward-looking investors are likely factoring that in to their decision making because while PayPal's business is still doing relatively well and it posted a profit of over $1 billion last quarter, tougher times may be on the horizon.
Crypto to the rescue?
One avenue that could give PayPal some more growth opportunities is crypto. This month, the fintech stock announced it is going to launch its own stablecoin, PayPal USD, which it says will be "100% backed by U.S. dollar deposits, short-term U.S Treasuries and similar cash equivalents."
PayPal customers can use the coin to transfer money and to send purchases on the company's platform. PayPal already allows customers to transfer crypto but this represents a deeper dive into digital currencies. And by offering its own coin, one that is backed by cash, it could attract people who may otherwise by wary of crypto given its volatility. Bringing in more traffic onto its platform should be a win for PayPal. The big question is just how much business this will drum up for PayPal and whether it can lead to a significant improvement in its growth rate.
I'm not too optimistic that this will be a game changer for the business as in tougher economic conditions people may be inclined to avoid crypto as a whole given the volatility often associated with it. But it's a growth opportunity for PayPal nonetheless and given the stock's low valuation today, that could make it a better long-term buy.
Analysts think PayPal's stock can soar by 50%
Many analysts have been lowering their price targets for PayPal this month in light of concerns around the company's slowing growth and its margins also tightening up. However, given its low price, there's potential for the stock to still have some significant upside.
The consensus analyst price target is just under $93, implying an upside of around 50% from where PayPal stock closed last week -- $61.54. Price targets only look at where analysts think a stock will go typically over the next 12 to 18 months. Over the longer term, the upside could be even greater.
Should you invest in PayPal?
Trading at only 12 times its estimated future earnings, PayPal is a cheap stock to buy given the S&P 500 is averaging a forward price-to-earnings multiple of more than 20x.
There's risk with PayPal but you can say that for any fintech stock right now given the uncertain future of the economy. But if you're prepared to buy and hold for the long term, this can be an ideal time to buy shares of PayPal. According to DigitalCommerce360, over 80% of the top 1,000 retailers in the world still offer PayPal as a payment option. Although there are more companies offering digital payments, PayPal remains a leader in the industry and while its growth rate may be sliding right now, that's not a pattern I would expect to see continue for the long term.
