Considering all of the investor interest in PayPal (PYPL 2.90%) stock, it might be surprising to hear that it's only gained 67% since it spun off from eBay in 2015, or about half of the S&P 500's gain over the same period. That's pretty depressing for shareholders.
It hasn't always been this way. PayPal stock was beating the market for a long time before it plunged over the past two years. Why is the market so down on PayPal now? And does this recent underperformance present an opportunity?
What's been going wrong for PayPal
PayPal is the leading digital payments company, with $1.5 trillion in total payment volume (TPV) over the trailing 12 months. TPV increased 15% year over year in the 2023 third quarter. It operates a double-sided business, counting TPV from merchant payments as well as peer-to-peer payments through PayPal and Venmo.
The pandemic became a big moment for PayPal as interest in e-commerce exploded, and that's PayPal's sweet spot. And yet, PayPal is more than just an e-commerce tool. It offers solutions for both online and offline merchants with payment processing tools and hardware.
It's not unusual that a company as large as PayPal reaches an inflection point at this stage. Its own growth is decelerating as it contemplates its path forward, and it hasn't maintained cost controls as it keeps getting bigger.
Not only has it grown to levels that make it more challenging to keep demonstrating increases, but it has spearheaded an industry that's drawing ever more competition. Alphabet's Google Pay and Apple's payment app are both becoming popular, and Block's Cash App and sellers business are both direct competitors to PayPal's services. Even Shopify, once known for its website-in-a-box business, now offers a full array of e-commerce solutions that are in PayPal's territory, and Shopify's service is growing much faster.
Where the opportunity is
There's still plenty of opportunity. E-commerce is growing as a percentage of overall retail sales and is expected to reach 23% by 2027, according to Statista. That's an organic growth driver for PayPal's digital payments business.
One of its biggest growth drivers is Braintree, a white-label checkout service. Although PayPal is more well known for its small business merchant services, this is a service that targets larger enterprise businesses and includes clients such as Krispy Kreme and Snapfish.
New CEO Alex Chriss only took over about two months ago, but he gave some indications of where he sees the company moving. He mentioned unlocking PayPal's value as a platform, as well as leveraging its broad machine learning, artificial intelligence capabilities, and years of consumer behavior analytics to strengthen its business proposition. Along with that, it's going to invest in technology and automation to lower costs and become more efficient.
One area PayPal has pinpointed is active customers. Customer count reached a high of 435 million last year, and it has since declined to 428 million. Management has said it's redirecting its resources toward engaging active customers, and transactions per active account (TPA) are increasing.
Image source: PayPal.
Should you buy PayPal stock?
PayPal stock is down 14% this year and is well off its highs. At the current price, it trades at a price-to-earnings ratio of less than 19, near all-time lows.
PayPal stock performance usually follows its net income, but that pattern has diverged recently.
That leads me to believe that it might be undervalued and that the stock price will rise to meet the real value of the stock. Because PayPal has so much opportunity ahead and expects profits to increase, I would expect its stock price to follow suit. PayPal stock looks like a buy right now.
