What happened
Shares of PayPal (PYPL 1.56%) stock fell 18% in August, according to data provided by S&P Global Market Intelligence. Investors continue to be disappointed in the digital-payments giant's direction after an uninspiring earnings report, and the announcement of a new CEO didn't do too much to alleviate investor concerns.
So what
After an incredible run-up during the early days of the pandemic, when everyone was buying online, PayPal's sales are slowing down. Total payment volume increased 11% in the 2023 second quarter, and revenue increased 7%. That's not too shabby, considering it's operating in an inflationary environment.
Like many other companies, PayPal expanded a bit too much when times were good and overshot. It launched a cost-cutting program that's now demonstrating progress, but it needs more.
Adjusted operating income increased 20% in the second quarter, and earnings per share (EPS) were $0.92 after a loss per share of $0.29 last year. Management is guiding for revenue to increase by 8% for the full year and EPS of about $0.86, with adjusted EPS to increase by about 13% to $1.23.
PayPal is the original digital-payments method, but there's been a deluge of new fintech companies and digital-payments solutions since e-commerce accelerated over the past few years. The company hasn't exactly been left in the dust but is losing active accounts and isn't standing out.
Management has said it's highly focused on generating more value from active clients and letting go of less active accounts. This strategy is bearing fruit, and transactions per active client increased 12% over last year in the second quarter. Much of it was driven by Braintree, a merchant payment-processing tool.
In other news, PayPal finally announced a successor to longtime CEO Dan Shulman. It has hired Alex Chriss, previously an executive at Intuit.
This gives investors some idea of the direction PayPal is taking, which looks like harnessing opportunities in recurring business revenue. This makes sense in light of the momentum with Braintree, and there could be some new paths for the company in the coming quarters.
Usually, the announcement of a new CEO sends a stock up, but there wasn't a lot of movement in this case.
Now what
The bear argument is that, while PayPal is still the leader in its field, by far, there isn't a lot of growth ahead. Other companies are more innovative, and PayPal is too big and clunky for fresh thinking.
The bull argument is that PayPal is still generating increasing sales, and a new CEO brings a fresh perspective that can reignite growth. E-commerce is still a growing industry, and PayPal is the top player.
PayPal stock is trading at the cheap valuation of 18x trailing-12-month earnings, and I would call it a bargain right now.
