PayPal Holdings (PYPL -2.62%) investors have had a rough go of it in recent years. The company enjoyed a boom during the pandemic, which brought with it increased online shopping and accelerated the ongoing transition to digital payments. As a result, PayPal stock roared higher, reaching over $300 per share, while investors optimistically valued it at over 100 times earnings and nearly 17 times sales.
The last couple of years have been a transitional time for the fintech. Customer growth has slowed, its focus has shifted, and it has hired a new CEO. Since its peak, the stock has lost 82% of its value, and by some valuation measures, it has never looked cheaper than it is today. Is it finally time to buy PayPal stock?
PayPal's pandemic-era growth was unsustainable
PayPal enjoyed staggering growth during the pandemic. Over the two years ending in 2021, it added 122 million accounts, increased revenue by 43%, and surpassed $1 trillion in total payment volume.
But the dramatic growth was unsustainable. For one, eBay, PayPal's former parent company, shifted to Adyen as its preferred payment platform, putting serious pressure on PayPal's growth. Heightened competition and a return toward more-normal spending habits as the pandemic eased also weighed on the company, and it realized it needed to shift its focus.
Changes are underway at the fintech
Last year, management, led by then-CEO Dan Schulman, shifted away from adding customers at a breakneck pace and instead focused on getting more revenue from existing customers. It would focus on growing transactions per active account (TPA), which it saw as a more cost-effective approach to growing revenue and the bottom line.
The strategy does appear to be paying off. In the third quarter, PayPal's active accounts declined 1% year over year, but TPA grew by 13% while payment volume increased by over 15%.
Image source: PayPal. Y/Y = year over year.
Another significant change in the past few months has been the change in leadership. Earlier this year, Schulman announced he would retire, starting PayPal's search for a new CEO. The company hired Chriss, an industry veteran who previously worked as a senior executive with Intuit.
What comes next for PayPal
The third-quarter earnings call was the first for the new CEO, who has his work cut out for him. The company experienced mixed results in the quarter, beating analysts' expectations, but continued to see some pressure on its margins.
Management has revised its guidance on operating-margin expansion from 125 basis points earlier this year to 75 points as of its most recent earnings.
The revisions are due to the shifting product mix. The company offers branded checkout, which prominently features the PayPal or Venmo brand. But it also offers unbranded checkout powered by Braintree, allowing merchants to accept payments without customers knowing it.
This has been a fast-growing part of PayPal's business and is why it has achieved TPA increases. However, the margins on this business aren't quite as attractive as its branded business.
Chriss said the company would aim for "profitable growth" as it focuses on reducing costs and improving margins with value-added services in Braintree -- a message that was well received by investors.
Is it a buy?
PayPal is undergoing a transition that will take some time. However, it appears to be an intriguing opportunity for patient investors. Today, the stock is valued at 16.2 times earnings, 11 times forward earnings, and 2.1 times sales, making it the cheapest valuation since it spun off from eBay in 2015.
PYPL PE ratio data by YCharts; PE = price to earnings; PS = price to sales.
The company could face headwinds if a slowdown in consumer spending leads to a recession. But its new management team (which includes a new chief financial officer and new chief technology officer), a vision for improving profitability, and a cheap valuation that provides some margin of safety make PayPal a solid value for patient investors willing to ride out its near-term growing pains.
