Investors have certainly been disappointed with the performance of PayPal (PYPL +0.76%) shares, which are currently down 80% from their all-time high. Shares have dropped 15% this year alone (as of Aug. 22), not benefiting at all from the broader market's rally.
The fintech company is dealing with a slowdown, a change of pace from the monster growth it registered during the worst days of the coronavirus pandemic. Other factors are also likely adding to the pessimism, but it's not all bad news.
Let's take a closer look at one reason PayPal stock is a screaming buy right now, and one reason investors should avoid it like the plague.
New leadership
Dan Schulman has been PayPal's CEO since the company was spun off from eBay in 2015. He led the business to tremendous growth, going from 179 million active accounts and $282 billion in total payment volume (TPV) in 2015 to 435 million active accounts and TPV of $1.4 trillion in 2022. Thanks to these impressive gains, PayPal's stock was up 740% between its spinoff and the all-time high, crushing the Nasdaq Composite index's 196% rise during the same time.
Schulman is set to retire at the end of this year, something current shareholders are probably cheering for. Bears could make a valid argument that some major acquisitions he made in recent years, like $4 billion for Honey and $2.7 billion for Paidy, were a waste of capital that instead could've been directed toward amplifying the core payments platform.
Moreover, Schulman lost credibility when he set a lofty target of PayPal reaching 750 million active accounts by 2025, double the total at the end of 2020, only to take that goal back when he realized that pandemic growth wasn't going to last forever.
It was recently announced that Alex Chriss, currently the executive vice president and general manager of the small business and self-employed group at Intuit, will replace Schulman. A leadership change might be exactly what PayPal needs to jump-start growth and improve capital allocation.
Chriss could bring a fresh perspective to PayPal's operations, doubling down on key products like the branded checkout button and Braintree, for example. He could also avoid making any costly acquisitions, instead using free cash flow to aggressively buy back more shares that are trading at a depressed price-to-earnings ratio of 17.
NASDAQ: PYPL
Key Data Points
Intense competition
At the end of 2022, PayPal was by far the most widely accepted digital wallet among the top 1,500 retailers in North America and Europe, with 79% of market share. By being a pioneer in electronic payments with a history that spans more than two decades, the company has developed a reputation and brand image known for security, convenience, and trust in the industry. And the first-mover advantage is why PayPal has such a big lead among rivals.
But the payments space is incredibly lucrative, and numerous businesses are trying to get a piece of the action. Behind PayPal, Apple Pay and Alphabet's Google Pay are the next two most popular digital wallets. And they are quickly gaining greater adoption. Apple Pay, for instance, saw its usage surge during the holidays last year, growth that far outpaced PayPal's during the period. Because the tech giants have a stranglehold on the market for mobile operating systems, they could find ways to prioritize their own checkout options over PayPal's.
Even Venmo, PayPal's popular peer-to-peer service, faces stiff competition from the likes of Block's Cash App, as well as Zelle, which is owned by a group of large banks. Venmo also offers debit and credit cards, but this raises competition from an unlimited number of financial institutions that do the same thing.
On the merchant side, PayPal's Braintree offering goes up against Shopify, Stripe, and Adyen. All of these rivals are formidable opponents offering a wide range of services to drive customer stickiness.
The business has to constantly be on top of its game because stiff competition increases the uncertainty surrounding PayPal's long-term prospects. That's something shareholders might want to avoid.
