The fintech landscape is rife with competition. Unicorn start-ups such as Stripe and Plaid have taken on the world's largest payment processors, while buy now, pay later functionality is all the rage among e-commerce platforms.
PayPal (PYPL +5.06%), which is one of the longest-tenured giants in online financial services, has been anything but immune to the rising competition among fintech businesses. This 2015 spin-off from eBay currently trades 80% below all-time highs set in mid-2021. Given such a precipitous drop, investors might be wondering if PayPal's best days are long gone.
I see things differently and think 2024 could be a massive year for the company. Let's dig into PayPal and assess why now might be a generational opportunity to buy the dip.
NASDAQ: PYPL
Key Data Points
Is PayPal's business broken?
The lion's share of PayPal's business stems from fees generated while processing transactions. While the company's total payment volume has trended upward for several quarters, PayPal's main problem stems from its transaction margin -- which has declined from 51% at the end of September 2022 to its current 45% at the end of Q3 2023.
The rise of other fintech platforms is not solely to blame for PayPal's tough position. Keep in mind that big tech companies such as Apple and Alphabet also offer digital payment services. While this might appear alarming on the surface, I am not worried about PayPal. Rather, as e-commerce becomes increasingly more popular among shoppers, I think the addressable market is expanding. While this theoretically offers more opportunity for PayPal, it also allows new companies to enter the space relatively easily.
Image source: Getty Images.
How PayPal can win in 2024
Although the competitive landscape is no doubt intense, PayPal has some catalysts that seem overlooked.
For starters, one of the highlights from the company's Q3 earnings was its growth overseas. PayPal's 41% market share is the highest among global payment processors, according to Statista.
Perhaps even more exciting is the advent of new online shopping apps. According to SimilarWeb, e-commerce apps Temu and Shein rank in the top five most downloaded shopping platforms in the U.S. Both of these apps are heavily used by the coveted Gen Z and Millennial demographics. Given that each online store uses PayPal at checkout, the demand that these apps experience could serve as a proxy for future business. Both Temu and Shein are relatively new in the U.S. Therefore, PayPal's monetization potential from each is likely still evolving.
But the most lucrative option for PayPal could lie in its peer-to-peer payments app Venmo. While PayPal is enjoying some growth overseas, its performance domestically has been uninspiring over the last couple of years. However, Venmo currently only works in the U.S. With more than 90 million accounts, I think it's high time PayPal figures out a way to better monetize the app.
While this may seem like wishful thinking, 2024 could be the beginning of a new PayPal. The company's CEO, Alex Chriss, only took over in September. However, Chriss swiftly made several leadership changes at the company and appears to be laser-focused on reigniting growth. I wouldn't sleep on Chriss' ability to inspire change, either. He was the architect behind Intuit's multibillion-dollar acquisition of Mailchimp -- helping the company evolve beyond its primary financial services software business.
Not only did this differentiate Intuit's product suite, but it opened the doors for the company to begin leveraging an entirely new user base from Mailchimp's data. PayPal could repeat this template for Venmo given its massive library of transaction history.
The stock looks cheap right now
Another thing investors should keep in mind is the state of the macroeconomy. While inflation lingers above the Federal Reserve's long-term target of 2%, it is showing signs of cooling down. Furthermore, after 11 rate hikes over the last year and a half, many economists believe the Fed may start to taper in 2024.
The combination of slowing inflation and lower interest rates could spark some accelerated buying activity among shoppers and businesses. Given PayPal's duel-sided business model serving both consumers and merchants, these market dynamics could be a bellwether for the company.
PYPL PE Ratio (Forward) data by YCharts
At a forward price-to-earnings (P/E) multiple of just 10.7, PayPal stock trades significantly below its long-term average and that of the broader markets. The S&P 500 boasts a forward P/E of 21.7, nearly double that of PayPal.
I understand how the perception of more competition could instill thoughts of fear about PayPal's future. However, by zooming out and thinking about the bigger picture, it becomes clear that PayPal has myriad ways it can reaccelerate growth.
Given its steep discount and low expectations, I think buying PayPal stock now is a no-brainer. The company appears to have the right leadership in place to ensure it executes on the long-term secular tailwinds fueling digital commerce. Right now could be an opportunity to take advantage of historically depressed prices, and potentially turn it into a multibagger.
