Is PayPal Stock a Buy Now?

PayPal's (PYPL 2.90%) stock price rose 4% during after-hours trading on Nov. 1 after the digital payments leader posted its third-quarter report. Its revenue rose 8% year over year to $7.4 billion and exceeded analysts' estimates by $20 million. Its adjusted earnings per share (EPS) grew 20% to $1.30 and cleared the consensus forecast by $0.07.

PayPal's headline numbers were stable, but its stock is still down nearly 30% this year and remains more than 80% below its all-time high. Let's see why the market gave up on PayPal -- and if it's finally the right time to turn bullish.

Image source: Getty Images.

Why did the bulls give up on PayPal?

PayPal's troubles started nearly six years ago, when its former parent company eBay (EBAY 1.32%) decided to replace PayPal with its smaller Dutch rival Adyen (ADYE.Y -1.57%) as its preferred payment platform. That transition, which happened gradually over the following five years, throttled PayPal's revenue growth.

The COVID-19 pandemic temporarily masked that slowdown throughout 2020 as PayPal profited from the spike in online sales and peer-to-peer payments. But after the pandemic's height passed, PayPal's growth cooled off significantly. Its ongoing loss of eBay's orders, fierce competition from other digital payment platforms, and intense macro headwinds for consumer spending all made it harder for PayPal to gain new customers and grow its revenue.

PayPal's total number of active accounts reached a peak of 435 million in the fourth quarter of 2022, but declined sequentially throughout 2023 to just 428 million in its latest quarter. Its revenue grew 21% in 2020 and 18% in 2021, but rose a mere 8% in 2022. As a result, many growth-oriented investors gave up on PayPal.

What happened over the past year?

PayPal has been bleeding active accounts over the past year, but it's offsetting those losses with a higher number of transactions per active account. It's accomplishing that through the expansion of its Venmo peer-to-peer payments app, new BNPL (buy now, pay later) services, and fresh deals with big enterprise customers.

That's why PayPal's total payment volume still rose 13% year over year on a constant currency basis in Q3 as its number of active accounts dipped 1%. That's also why its year-over-year revenue growth stayed in the high single digits throughout the first three quarters of 2023, and it expects 7% to 8% revenue growth in Q4.

Data source: PayPal. YOY = Year over year.

PayPal's revenue growth seems to be stabilizing, but it likely still disappointed a lot of investors who had been expecting a quick return to double-digit growth. The recent departure of CEO Dan Schulman, who had led the company since its spin-off from eBay in 2015, raised even more questions regarding its future growth.

During the Q3 conference call, PayPal's new CEO Alex Chriss admitted that the company's focus had "not been clear" as it faced more competitors in an increasingly complex market. Chriss also said PayPal still had a lot of "work to do" and "challenges to tackle."

Prioritizing its margins and profits

As PayPal's growth cooled off, it focused on stabilizing its operating margins, keeping its free cash flow (FCF) positive, and boosting its earnings per share (EPS) with buybacks.

Data source: PayPal.

It expects its adjusted EPS to grow 10% year over year in the fourth quarter and rise 21% for the full year. It also expects to generate "at least" $4.6 billion in FCF for the full year, which would represent a 10% drop from 2022 (partly due to the pending sale of some of its BNPL loans), yet it still plans to buy back about $5 billion in shares for the full year.

The bulls might praise those big buybacks as a confident move that implies PayPal's shares are undervalued. However, the bears will claim it's a waste of cash that would be better spent on the expansion of its fintech ecosystem.

Is it the right time to buy PayPal's stock?

PayPal's stock looks dirt cheap at 9 times forward earnings, and its insiders have bought nearly 50% as many shares as they've sold over the past 12 months. Analysts expect its revenue and adjusted earnings to rise 9% and 14%, respectively, in 2024, as the macro environment improves.

We should take those estimates with a grain of salt, but PayPal's growth rates over the past few quarters suggest that brighter days are ahead. Its decoupling from eBay is in the rear-view mirror, and a cyclical recovery in consumer spending could tether more merchants and buyers to its ecosystem. Therefore, I believe there are still more reasons to buy PayPal as a long-term investment than to sell it right now.