Shares of PayPal Holdings (PYPL 1.27%) dropped 11.4% in October, according to data provided by S&P Global Market Intelligence. It feels like the downtrend will never end. As of this writing, PayPal stock is down 27% year to date after falling 63% in 2022.
Judging by the returns of the Global X FinTech ETF, it seems investors aren't keen on fintech stocks right now in general, which doesn't help PayPal stock. But PayPal's business may not be living up to its full potential, as I'll explain.
PYPL Total Return Level data by YCharts.
What happened in October for PayPal?
To clarify, there wasn't much happening for PayPal in October -- nothing that would meaningfully hurt its investing thesis anyway. One of its only press releases was an inconsequential study from one of its subsidiaries, Happy Returns. The study found that consumers increasingly prefer to return things in person, which is clearly not a bearish indicator for PayPal.
I do bring up the Happy Returns study because PayPal decided to sell this subsidiary to UPS on Oct. 25. Terms of the deal weren't disclosed, but it's fair to assume it wasn't much money. But divesting this could be helpful as the company sharpens its focus.
PayPal left news-less October and kicked November off with financial results for the third quarter of 2023. New CEO Alex Chriss has been on the job for less than a quarter, but he's excited about the possibilities. Chriss said, "The opportunity to ... unlock profitable growth makes it an exciting time to be at PayPal."
It seems like "profitable growth" was still largely aspirational in Q3. PayPal did grow its net revenues by 8% from the prior-year period. And it was profitable, with operating income of $1.2 billion. However, the company dropped to 428 million active accounts, down from 432 million in the same quarter of 2022. And its profitability took a step back, with its operating margin contracting from 16.3% last year to 15.7% in Q3.
Chriss has a lot to work with
With still 428 million active accounts, PayPal has a lot for new CEO Chriss to work with. Importantly, while accounts are down, ongoing users are more engaged. Active accounts have made 56.6 transactions on average over the last year, up 13% from the prior-year period.
PayPal is certainly a stable company. But it will need to reinvigorate growth or improve margins if the stock is going to gain back the ground it's lost in recent years. For evidence of one problem to watch for now, PayPal had free cash flow of $1.1 billion in Q3 but repurchased $1.4 billion in its shares.
Right now, it's spending more money on buybacks than it's making, which clearly indicates that it needs to find ways to increase its earnings. Investors will need to stay attentive to plans articulated by management in this regard.
