PayPal (PYPL +0.46%) is a leader in digital payments, which has proved to be a powerful growth trend over the past couple of decades. But its share price hasn't reflected this positive backdrop; it is currently 81% below its all-time high and down 18% in 2023 (as of Sept. 28). That's a far cry from the double-digit gain for the Nasdaq Composite Index this year.
Investors who are looking at adding PayPal to their portfolios might want to understand three important things about this fintech first.
1. Its key segments
The company's branded checkout button is what most investors are probably familiar with. This service, which competes with well-known rivals like Apple Pay and Alphabet's Google Pay, accounted for 30% of PayPal's total payment volume (TPV) in 2022.
But the Braintree segment that offers payment solutions to merchants, which was acquired for $800 million in 2013, is on its way to becoming the most dominant part of the PayPal pie. Its TPV of $400 billion in 2022 puts it on par with the branded checkout service as the most important driver of results. Braintree also operates in a competitive industry, going up against Shopify, Stripe, and Adyen.
Last year, Braintree's TPV growth seriously outpaced branded checkout, and this has implications for PayPal's profitability. Since Braintree generally carries lower margins, its growth is a headwind for PayPal's bottom line. Investors should pay attention to these trends.
There's the peer-to-peer service called Venmo. With 2022 TPV of nearly $250 billion, it is the third biggest aspect of PayPal's business. What's special about Venmo is that it benefits from network effects: If friends want to be able to send and receive money among themselves, there's a clearer incentive to sign up for the service. And this means it gets better the larger it gets.
NASDAQ: PYPL
Key Data Points
2. Its strong financials
You wouldn't be able to tell by the stock's poor performance, but PayPal is a company that possesses superb financials. It consistently generates free cash flow (FCF), which totaled $3.7 billion in the last 12 months. And management uses this cash to buy back shares. It plans to repurchase $5 billion worth of stock this year.
The balance sheet is also strong. As of June 30, PayPal had $14.4 billion of cash, cash equivalents, and investments, higher than the $10.5 billion of debt it carried. This sound financial position not only should provide investors with some peace of mind, but it also affords PayPal the ability to continuously find ways to invest in growth opportunities.
Last year, when the Federal Reserve hiked interest rates at the fastest pace in history, it created a difficult operating environment for many businesses. Despite this, PayPal was able to increase revenue by 8% in 2022 versus the previous year. This is a clear indicator of the company's resilience, something the financial data points to.
3. Its fairly inexpensive valuation
Since PayPal's spinoff from eBay in 2015, shares have risen just 59%, a return that significantly lags both the S&P 500 and the Nasdaq Composite Index. The stock's poor performance is even more alarming if we look at the past couple of years. As of this writing, shares are currently 81% below their July 2021 peak price.
This presents investors with a compelling opportunity. The stock trades at a trailing price-to-earnings (P/E) ratio of just 16.3, which is 67% below its historical average P/E multiple of 49.2. On a forward basis, the P/E stands at 11.8. It's hard to deny just how attractive this looks.
While it's not easy to point to one single reason for why the stock is so beaten down, some shareholders might blame the current CEO, Dan Schulman, as having destroyed value with costly acquisitions that weren't key to the core of the business, like Honey and Paidy. Perhaps the incoming CEO, Alex Chriss, can get PayPal back on track to rewarding investors.
