Not all stocks have benefited from the market's rally in 2023. Just look at PayPal (PYPL 3.98%), a leader in electronic payments with a more than two-decade history. Its shares have tanked 18% this year (as of Dec. 7).

Is this beaten-down fintech stock a buy, sell, or hold right now? Here's what investors need to know.

Healthy fundamentals

Looking at PayPal's stock, you'd immediately think that the business was facing some massive challenges. However, this isn't true.

Yes, the company has experienced a notable growth slowdown following monster growth in 2020 and 2021, thanks to the pandemic accelerating digital-payments activity. Revenue was up less than 9% in 2022. And through the first three months of 2023, sales increased by 8% year over year.

Higher interest rates, coupled with inflationary pressures, negatively affect a business like PayPal because its payment platform leans toward online purchases and consumer discretionary activity. These feel the pain when consumers are pinched and have to stretch their budgets.

But that top-line growth rate this year is hardly any cause for concern. It indicates that PayPal is not only keeping the gains it amassed during the pandemic, but also building on top of this.

In the most recent quarter (Q3 2023 ended Sept. 30), the company processed $388 billion of total payment volume (TPV), representing a 15% rise versus the same period a year ago. Four years ago, this figure was $199 billion.

There might be worries that PayPal's user base is hitting a plateau. Active accounts total 428 million, down 3 million from just three months ago and 4 million from a year ago. But again, this number is much higher than it was prior to the pandemic.

What's really encouraging is that engagement is increasing at a strong pace. During the third quarter, transactions per active account (during the trailing-12-month period) rose 13%.

From PayPal's perspective, getting its existing customers to use the platform more often can be a boon financially. Less money needs to be directed to sales and marketing initiatives. And because this is a fee-based operation, greater usage results in higher revenue.

Investors also can't forget that this is still an extremely profitable enterprise. Non-GAAP earnings per share (EPS) jumped 20% in Q3. This was boosted by cost-cutting efforts.

"In the third quarter, we again demonstrated strong expense discipline and our ability to operate our business with improved efficiencies," CFO Gabrielle Rabinovitch said on the Q3 2023 earnings call.

PayPal also generates lots of free cash flow (FCF), to the tune of $5.1 billion in 2022 and an estimated $4.6 billion in the first nine months this year. All of the company's excess cash is used to repurchase stock. Management plans to buy back $5 billion of shares in 2023.

Given how cheap the stock is valued (more on this below), this could be the best capital allocation decision that the leadership team makes. PayPal's market cap has averaged $75 billion this year, so retiring $5 billion worth of shares should have a substantial impact.

Buy the stock

PayPal's fundamentals remain attractive for quality-focused investors. Despite macro headwinds, this is a business that isn't showing any signs of deteriorating.

And because the stock has gotten absolutely obliterated in the last couple of years, it's trading at an incredibly cheap valuation. The current price-to-earnings (P/E) ratio sits at 17.4. (For what it's worth, PayPal shares have averaged a P/E multiple of 48.4 since the company was spun off from eBay in 2015.) This is a meaningful discount that shouldn't be passed up.

To be clear, PayPal looks like a smart stock to buy today for long-term investors.