PayPal (PYPL 2.90%) was once one of the best-performing stocks around. The pandemic and a rise in online shopping helped drive superb growth, leading to monster gains in 2020.
But since this leading fintech stock peaked in July 2021, it's been a disappointing story. It currently sits 80% below that record high. And even in 2023, the shares have declined 13% (as of Dec. 21), which is upsetting given the market's healthy gains.
Better days might be on the horizon. There are reasons to believe that PayPal could explode higher in 2024.
Stronger consumer discretionary spending
As a digital payments platform, the purchasing activity that PayPal handles skews more toward discretionary items. It's not surprising that softer economic conditions, which are the result of higher interest rates and above-normal inflation, hurt the business. Revenue and total payment volume (TPV) increased 9% and 8%, respectively, in 2022. The top-line growth rate was similar through the first nine months of 2023, a far cry from the monster gains posted in the years before.
The Federal Reserve has hinted that it could cut interest rates at various points throughout 2024. This would be an accommodative stance that could boost the economy, leading to higher consumer confidence and greater discretionary spending.
There's no doubt that a stronger economic backdrop would help PayPal get its TPV and revenue growth back to double-digit levels. And that could lead to gains in the stock price.
Benefits of new leadership
Since PayPal was spun off from eBay in the summer of 2015, Dan Schulman was the chief executive officer until his retirement this year. And while he led the payments giant during bouts of superb expansion, arguments can be made that he took the focus off of the core payments platform.
Under Schulman's lead, PayPal made major acquisitions, like $4 billion for Honey and $2.7 billion for Paidy, that might have distracted the management team and destroyed shareholder value. Only toward the very end of his tenure as CEO did he direct the strategy to figure out ways to boost engagement from existing active accounts.
Alex Chriss, Schulman's replacement, could be the breath of fresh air that PayPal needs right now. He wants to focus on PayPal's most promising growth opportunities, like Braintree, branded checkout, and Venmo. And that's something shareholders should appreciate.
"I have no doubt that we will drive the financial discipline, necessary efficiencies, and operational excellence our company requires," he said on the Q3 2023 earnings call.
Chriss has already made a splash, as PayPal sold Happy Returns, a reverse logistics segment, to UPS for an undisclosed amount.
If PayPal keeps making progress on becoming a leaner organization that can also achieve strong growth, this should lead to improved financial performance.
Gaining respect from investors
As I touched on earlier, PayPal shares have been a huge disappointment. This has especially been the case in 2023.
However, the stock is cheap right now. It trades at a forward price-to-earnings ratio of just 12.4. The comparable multiple for the overall S&P 500 is more than 21.
I think this valuation doesn't do PayPal justice. This is a business with a competitive advantage whose revenue and adjusted earnings are still rising at a healthy clip. And it benefits from the secular trends of electronic payments and online shopping.
This is somewhat speculative, but should market sentiment shift and become positive, PayPal's valuation multiple will expand meaningfully. As a result, the stock could explode in 2024.
