Last year wasn't the best for PayPal (PYPL 2.90%). The one-time top growth stock ended the year down 14%, and it's still trying to find its footing as it deals with challenges on several fronts. Investors have lost confidence.
But are they getting it wrong? Let's see why there's so much pessimism, how PayPal is responding, and whether PayPal can still be a millionaire-maker stock.
Is it really as bad as you think?
PayPal's growth has slowed after soaring during the early stages of the pandemic lockdowns. Sales increased 8% in the 2023 third quarter compared with as much as 30% in some periods a few years ago, while total payment volume increased 15%. It's still the leader in digital payments, with $1.5 trillion in payment volume over the trailing 12 months and 430 million active customers. It's been struggling with pressure on the bottom line as well, and it posted a quarterly net loss in the second quarter of 2022, but that's on the mend.
While there isn't anything spectacularly bad that stands out, investors haven't been impressed with PayPal's trajectory. It's facing new competition in the exploding industry of fintech, and it hasn't been as innovative or agile as some newer, smaller companies. In general, being the market leader is an advantage, but the danger is losing focus and not keeping up.
PayPal has gotten so big and its services are so far-reaching that it doesn't appear to have a clear direction. To generate higher growth and investor optimism, it needs a more distinct identity. On top of that, when companies get really big, they're usually reliable for high net income. PayPal has to return to that for the stock to rise.
Growth drivers abound
But you shouldn't count PayPal out yet. It has the upper hand with its dominant platform, and it's committed to change. Chief Executive Officer Alex Chriss took over toward the end of 2023, and he's on board to figure out PayPal's next steps. And there are plenty of ways to go.
One thing to keep in mind is that e-commerce is a growing industry and is forecast to outpace overall retail growth over the next few years. PayPal has a place in physical retail as well, but e-commerce is its sweet spot, and as it expands, that's a natural external tailwind.
On top of that, many retailers are reporting that inflation is moderating, and that should lead to organic sales growth in the near term.
In terms of using its resources, PayPal has already identified that it's more cost efficient to focus on active customers than total member count. Membership has decreased as the company changes course, but transactions per active customer have increased.
Something that I've pointed out before and keep coming back to is that historically PayPal's stock price correlated well with its net income until the quarterly loss in 2022. But while net income is rebounding, the stock price hasn't followed suit.
That looks like an opportunity for investors, because as investor sentiment improves, the stock price should rise and once again correlate more closely with earnings.
How high can PayPal stock go?
PayPal stock is likely to bounce back, and it should reward shareholders over many years. Some of the biggest stocks today, including Apple and Amazon, lost large percentages of their value several times on their way to more than $1 trillion in market cap.
But can PayPal stock make you millionaire? Right now, it's looking more like a value stock than a growth stock, and it doesn't even pay a dividend. But the stock could easily rise on improvements and more favorable investor sentiment. Over time, it offers serious potential for gains.
Right now, PayPal stock trades at a dirt-cheap price-to-earnings ratio (P/E) of only 17.5. Management has forecast earnings per share (EPS) to increase from $2.09 in 2022 to $3.75 in 2023, or an 80% increase. Keeping the P/E constant, an 80% increase in EPS should lead to an 80% increase in share price. If the P/E increases, which would be likely as investors feel more confident about the stock, the price could rise further.
Can PayPal deliver huge gains in 2024? Yes. If you invest enough money and wait enough time, PayPal could be a component of a millionaire-maker stock portfolio.
