PayPal Holdings (PYPL 2.90%) was once the unmatched leader in fintech, practically creating the category single-handedly with its peer-to-peer digital payments and online shopping capabilities. But even the top leaders aren't immune to industry changes and young competition. Remember America Online? Yahoo?
PayPal is feeling the impact of fintech becoming mainstream, as well as macro headwinds like inflation. Where will PayPal stock be a year from now, and is it a good time to buy?
New CEO, new focus
Given PayPal's struggles, it wasn't surprising to hear that CEO Dan Schulman decided to step down last year. New CEO Alex Chriss is already making changes, including a C-suite makeover that will have long-term consequences.
Chriss noted in his first earnings call that PayPal has become a large and complex operation, making it more difficult to determine what its purpose, niche, and mission are. He is working to distill that and chart a direct path forward.
However, PayPal may have lost ground competitively by coasting on past successes rather than continuing to strive to improve its products. Companies like Block and Apple have entered the competitive field, as have some newcomers to the industry. While they don't represent an immediate threat to PayPal's dominance, they often have perfected a niche fintech service that's better than PayPal's version. That chips away at PayPal's lead and certainly its growth opportunity.
Under Chriss' leadership, PayPal has launched specific improvements in many of its services. For example, users can now send customized gift cards from popular retailers through Venmo, which is a PayPal-owned service, and the company improved its early fraud detection capabilities.
Paypal also launched several partnerships, such as the ability to use Apple Pay through Venmo on Apple devices and several small business initiatives in partnership with Meta Platforms.
It's the biggest, but is it the best?
PayPal has an unmatched lead in digital payments, with $1.5 trillion total payment volume (TPV) in the trailing 12 months. Third-quarter TPV increased 15% over last year. While that's a slowdown from pandemic highs, there's still plenty of momentum, and customers continue to find value in using PayPal's platform.
Revenue increased 8% year over year to $7.4 billion, coming in above its guidance, and adjusted earnings per share (EPS) rose 20% over last year to $1.30. Management is expecting full-year revenue growth of 6% to 7%, with adjusted EPS to increase 21%. It will provide 2024 guidance in the upcoming fourth-quarter report.
This is an important year for PayPal, and in some ways, it's a make-or-break moment as new management charts its new path. That makes it more difficult to see where the company will be in one year.
In the best-case scenario, it's increasing sales at a higher, low-double-digit rate and expanding margins. The worst-case scenario is the strategy doesn't work and PayPal loses members and market share.
Tailwinds too strong to ignore
Perhaps the most compelling reason to maintain confidence in PayPal's future is that e-commerce continues to increase as a percentage of total retail sales. PayPal has its finger in both digital and brick-and-mortar shopping, but as the leader in e-commerce, it stands to gain the most from the reacceleration of e-commerce sales.
The digital payments industry is expected to increase at a compound annual growth rate of 11.8% through 2027, reaching nearly $14.8 trillion, or nearly 10x PayPal's current TPV. As e-commerce continues its rebound, PayPal is poised to post organic growth, at the very least.
PayPal is in flux right now as new management changes its trajectory, but the fundamentals are the same and quite strong. PayPal is also benefiting and will continue to benefit from e-commerce growth and the embracing of an omnichannel model that includes internet, mobile, and even in-person payments. The company is a star in providing that level of diversity.
What could clinch PayPal's stock status as a buy is its dirt cheap valuation. It's trading at a price-to-earnings ratio of only 16.5, its cheapest price in more than 10 years.
Even if it deserves a reduction in value since its soaring pandemic growth, it looks like that may have gone too far and presents an opportunity for investors. In one year, PayPal should be in better shape, with more stability, a clearer and more focused direction, and improved earnings.
