The past couple of years have been anything but rewarding for PayPal (PYPL 2.90%) shareholders. Although the stock soared during the COVID-19 pandemic, the deceleration of the contagion more than undermined this gain. PayPal shares now trade more than 80% below their mid-2021 peak, reaching new multiyear lows this month.
It's too soon to throw in the towel on PayPal, however. There's a good chance this stock will be rekindled, perhaps doubling its current value over the course of the coming five years. Here's a closer look at what it would take to make that happen.
Four things would-be PayPal buyers are waiting to see
The steep sell-off is largely understandable. Although COVID-19 was something of a boon for the online payment middleman, the exit from the pandemic created a great deal of uncertainty. Also bear in mind that right before COVID-19 took hold, several cryptocurrencies began tiptoeing their way into the mainstream. The bulk of this selling has been defensive in nature, driven mostly by fear of the unknown.
Nevertheless, the pullback from 2021's high is still arguably overdone.
See, PayPal remains the worldwide leader of the online payment space, accounting for more than 40% of worldwide payments. It's also still driving growth. The company generated more sales last year than it did in 2021, and is on pace to do more business this year than it did in 2022 despite the slow return to pre-pandemic spending norms.
The problem? None of it has been enough to spark bullish interest in the stock.
At least four specific things need to take shape if this selling is to turn back into price-inflating buying.
1. PayPal must reaccelerate new account growth: Kudos to the company for being able to bring any new users into the fold of late. As of the end of the quarter ending in June, the company boasts 431 million active accounts versus only 429 million a year earlier, and 403 million as of the second quarter of 2021, when the COVID-19 pandemic was at its peak. These customers use their accounts more than they ever have, too, logging an average of 54.7 transactions during the second quarter of the year compared to 48.7 in the same quarter a year earlier.
Except, the more recent user-growth picture actually points to a headwind. The second quarter's headcount of 431 million is only slightly higher for the 12-month stretch, and it is actually down slightly from the first quarter's count of 433 million, which was down slightly from the fourth quarter's figure of 435 million.
There's a case to be made that PayPal is "maxed out" in terms of its addressable market.
2. Cash flow needs to turn around (and stay there): The organization has been willing to spend as needed in its effort to generate account growth. Ditto for inducing current account owners to use this online payment option more frequently.
But it's come at a price. Transaction expenses are up just as much as revenue is this year so far, and PayPal's venture into the buy now, pay later loan business is leading to cash-burning writedowns. End result? Free cash flow turned outright negative during the second quarter of this year, accelerating a couple of quarters' worth of declines.
Image source: PayPal Holdings Q2 2023 conference call presentation.
The good news is this should be the last of the predictable writedowns. The bad news is PayPal's exposure to the overall loan market still leaves it indirectly (and even directly) vulnerable to a growing number of delinquencies and defaults. It's got $1.9 billion worth of loans on its balance sheet right now that are for sale, perhaps with more on the cusp of being added to its portfolio.
Whatever the cause, PayPal can't afford for its negative cash flow to persist.
3. Its blockchain-based stablecoin needs to be embraced in earnest: In retrospect, the hype surrounding cryptocurrencies back in 2019 and 2020 was never going to be justified. The premise of digital money and its underlying blockchain technology, however, is starting to make sense as a means of better managing fiat (government-issued) currency.
Enter PayPal's so-called U.S. dollar stablecoin.
According to the company, PayPal's stablecoin is "fully backed by U.S. dollar deposits, U.S. Treasuries and similar cash equivalents, and PayPal USD can be bought or sold through PayPal at a rate of $1.00 per PayPal USD." In other words, it's a digital version of the U.S. dollar with the security that only blockchain can provide. As such, it's far more likely to be accepted as an alternative form of payment, since it's linked to a specific government-issued currency at a fixed exchange price.
There's still a great deal of consumer education that needs to be done regarding the alternative to an actual U.S. dollar. PayPal's stablecoin was only launched in August, after all.
Even so, this particular cryptocurrency has the potential to make sense to the masses. If it ends up being the long-awaited game changer, it could readily funnel consumers toward PayPal's digital wallet platform.
4. Investor perceptions of PayPal must improve: This last factor may be the most arbitrary one dragging PayPal shares lower, but it's also arguably the most important. That is, the stock's been such a poor performer for so long now that too many investors may be giving up on it -- forever. It's a problem simply because it takes a group of bullish investors to push a stock higher.
It's getting help from the analyst community, for the record. As of the most recent look, the consensus price target stands at $85.24, up 47% from the stock's present price. Most of these analysts also rate PayPal stock a resounding buy, almost in defiance of the recent downtrend. Indeed, it's possible the professionals' overall opinion of PayPal would be even more bullish were the stock not still moving lower. Should shares begin inching upward, don't be surprised to see this consensus scoot higher with it.
Regardless, even with its relatively low price target investors as a whole aren't biting ... or even nibbling. Something about this ticker is instead prompting the masses to steer clear of it. Until that changes, analysts' optimism alone isn't enough.
What to do in the meantime
In most cases, the time to step into a good company is when the stock is down for all the wrong (usually short-term) reasons. By the time a company is a clear winner, much of its stock's upside is already in the rearview mirror. And, there's no denying PayPal Holdings is a solid outfit with staying power even if its highest-growth days are in the past.
This is one of those cases, however, where you might not want to be too quick to jump on board. All four of the feats described above are pretty tall orders.
All the same, there's certainly good enough reason to add PayPal to your long-term watch list. And for more speculative investors, you could certainly do worse than buying PayPal shares at this deep low.
