The stock market has rebounded significantly after a tumultuous year in 2022. Today the S&P 500 is within 5% of its all-time high.
Fintech company PayPal (PYPL 2.90%) hasn't gotten the memo. The stock remains in the gutter, roughly 80% down from its high two years ago and still within a stone's throw of its 52-week low.
But PayPal might be an increasingly rare contrarian stock idea in an increasingly rosy market that is pushing prices of most stocks higher. Here is why PayPal could be a stock worth buying today.
A victim of the Innovator's Dilemma?
PayPal, founded in the late 1990s, is one of the original fintech companies. That may sound good, but staying on top of the technology industry isn't easy. The Innovator's Dilemma (the seminal book on strategy by Harvard Business School professor Clayton Christensen) goes into great detail on how incumbents can be put in a tough spot between continuing established business models and innovating to keep competition at bay.
Over the years, new, innovative competitors have emerged in the payments space, including Stripe, Apple (with its Apple Pay), and more. They are all chasing the digital payments space where PayPal built its company. There is some validity to these concerns. For example, PayPal has lost roughly 7 million accounts since Q4 of 2022, and gross margins are on a multi-year downtrend.
PYPL Gross Profit Margin data by YCharts
These trends and old leadership, including a 65-year-old CEO, have much to do with the market losing confidence in the company, thus pressuring the share price.
A quantum leap forward
PayPal began rebuilding itself by first bringing in former Intuit executive Alex Chriss as the company's new CEO after former chief Dan Schulman stepped down earlier this year. Recently it became known that Chriss initiated an urgent redesign of PayPal's products' user interface after beginning his role.
The idea, internally known as Project Quantum Leap, is that PayPal needs to refresh its product experience in the face of more modern competitors. PayPal aims to have redesigns done by year-end and rolled out in early 2024.
It's a healthy attitude to seek change proactively. PayPal's business is still tremendous (more on that below), but the downtrend in accounts and profit margins is a concern. Investors must see if the changes work, which could take several quarters to answer.
Healthy growth at a bargain price
PayPal has undoubtedly addressed some challenges, and the changes must still prove effective, so it's fair to say PayPal is a riskier stock than it's been in years. However, it seems Wall Street is underestimating PayPal.
Remember that PayPal still has nearly 430 million active accounts doing $1.5 trillion in annual payment volume. According to Statista, PayPal controls 40% of the global online payment processing technologies market. Analysts are also optimistic about PayPal's business, estimating earnings will grow by an average of 15% annually over the long term.
PYPL PE Ratio (Forward) data by YCharts
Yet the stock's price-to-earnings ratio (P/E) keeps dropping. At just 12, that's a PEG ratio of less than 1, meaning the stock is a bargain if it achieves its estimated growth.
Perhaps Wall Street wants to see more results from PayPal before becoming more confident in the business model. That's fine, but investors buying before the herd again shows love for PayPal stock will generate the best investment returns.
