The business world is filled with examples of companies undergoing transformational changes. Disney presents an interesting case study in this regard. For decades the company was perhaps best known for its magical, fictitious cartoon characters. But during the mid-2000s, Chief Executive Officer Bob Iger went on a spending spree and acquired animation studio Pixar, as well as Marvel Entertainment and Lucasfilm.
In the blink of an eye, Disney bolstered its already-impressive brand portfolio with legendary franchises such as Star Wars and Indiana Jones, and spearheaded the Marvel Cinematic Universe. These deals subsequently opened up an entirely new library of content, experiences, and merchandise for Disney.
The ability to reinvent a business operation takes a healthy combination of skill and courage, but it can be done. E-commerce and fintech pioneer PayPal (PYPL +0.78%) is at an interesting juncture in its lifecycle. The financial operation is a mixed bag and the competitive landscape is ripe with myriad players. Furthermore, the company it getting ready to replace its CEO, who is retiring.
With so much turbulence, investors have been fleeing and looking to stockpile cash elsewhere. In just the last month the stock is down almost 17%.
Let's take a look at the highlights and lowlights of PayPal's business, and find out why a new CEO may be just what the company needs.
Moving beyond the core business
Earlier this month PayPal reported earnings for the period ended June 30. While total revenue increased 7% year over year to $7.3 billion, the company's transaction margin details also received attention.
During Q2, PayPal's transaction margin was 45.9%. To put this into perspective, take a look at the historical transaction margins below:
| Q2 2023 | Q1 2023 | Q4 2022 | Q3 2022 | Q2 2022 |
|---|---|---|---|---|
| 45.9% | 47.1% | 49.7% | 51% | 48.7% |
Data source: PayPal Q2 2023 Investor Relations presentation.
The obvious takeaway is that PayPal's transaction margin has been steadily declining over the last year. As it stands, the lion's share of the company's total revenue stems from transaction fees. For this reason, investors and analysts tend to scrutinize PayPal's transaction margin trends. Given the decline, some investors may be concerned over the sustainability of PayPal's long-term growth.
In addition to transaction fees, PayPal also generates revenue from other value-added services. But per the Q2 report, these other solutions only accounted for 10% of PayPal's total revenue. However, I am optimistic that PayPal can jump-start this revenue category, thanks in part to some pending changes at the top.
Image source: Getty Images.
The new brains behind the operation
Following the earnings release, PayPal named former Intuit executive Alex Chriss as its next CEO. Intuit began as a modest personal finance tool, and over the years the company has evolved into a one-stop shop for financial services through properties such as TurboTax, Quickbooks, and Mint. But in 2021, Intuit made headlines as the company added marketing automation capabilities to its ecosystem, acquiring Mailchimp for $12 billion.
Chriss is credited as one of the architects of the Mailchimp acquisition, which demonstrates his ability to identify products and technology that can augment existing infrastructure while simultaneously opening up new markets for mature businesses. When it comes to PayPal, the company already has some new initiatives underway and Chriss may be the person to lead those efforts.
For example, PayPal recently launched its own stablecoin. Despite Coinbase acting as the poster child for mainstream crypto and Web3, the move is a major step forward. Additionally, during a recent panel discussion on CNBC, Jim Cramer echoed this sentiment, stating, "If I were doing crypto right now, I'd switch to PayPal."
Only time will tell if crypto is a good idea for PayPal. Given the incoming CEO's business acumen and his ability to integrate new products and services into existing ecosystems, I am confident that PayPal can undergo a similar Intuit-style evolution as it looks to establish itself as an end-to-end digital wallet for merchants and consumers.
Is the stock a buy?
Data source: YCharts
The chart above shows the price-to-sales ratio for PayPal and a number of fintechs. PayPal trades at the lower end of the spectrum, second to only Block. Meanwhile, Cathie Wood favorites SoFi and Adyen trade at meaningful premiums to the more mature PayPal.
While PayPal may appear undervalued against its peers, another data input on the company's valuation is Wall Street analyst price targets. After the company's second-quarter earnings report earlier this month, a number of financial institutions issued revised price estimates.
Canaccord Genuity lowered its price target from $160 to $110. Although this is a meaningful haircut to its prior estimate, the $110 per share target still represents 80% upside to PayPal's recent price. Moreover, both Wedbush Securities and Truist have $85 price targets, representing 40% upside at the time of this article. Lastly, J.P. Morgan actually increased its target from $90 per share to $100, signaling a potential upside of 65%.
Wall Street still seems to have bullish overall sentiment on PayPal. I feel that PayPal stock has been punished enough, and that the current price reflects an overdone sell-off.
With the intense competitive landscape as well as PayPal's core transaction business in need of a lifeline and a greenfield opportunity to build a value-added services business, this company's story is not quite over. For investors looking for exposure to fintech, I believe dollar-cost averaging into PayPal over time could result in some meaningful profits.
