Most investors have probably heard of PayPal (PYPL 2.90%). Founded more than two decades ago, the leader in digital payments has helped to spearhead the growth of cashless transactions. And it now has become an important part of how consumers and businesses do commerce.
It's smart to take the time to understand more about the company. That said, here are three things you need to know if you want to buy this fintech stock today.
Multiple platforms
Three key aspects of PayPal drive payment volume. Investors are likely most familiar with the branded checkout solution, which is what consumers use when they want to purchase something on their favorite websites. PayPal has become so ubiquitous, that at the end of 2022, it was accepted at nearly 80% of the top 1,500 retailers in North America and Europe, a huge lead versus the next best rival.
While growth for the branded checkout button has slowed, the unbranded checkout solution, known as Braintree, has posted rapid gains. This segment targets merchants, providing them with various services to securely and seamlessly accept payments. Braintree's total payment volume (TPV) soared 40% in 2022, representing 30% of PayPal's overall TPV at that time.
Because Braintree's margins are typically lower than branded checkout, the company's profitability will continue to be pressured as this division keeps outpacing overall growth. This is something investors need to watch.
And we can't forget about Paypal's peer-to-peer service known as Venmo. Investors might view Venmo as just a service that lets people send or receive money to others, but it has become much more. Small businesses can accept payments via Venmo, and there are even Venmo-branded credit and debit cards.
Strong financial position
Whereas many newer fintech businesses out there are far from reaching sustainable profitability, PayPal has long been a beacon of financial soundness. Even as the company continues to face macro headwinds that are slowing its growth metrics, PayPal is very profitable.
In the third quarter, the business produced $1 billion of net income on $7.4 billion of revenue, for a margin of 14%. That's down from the year-ago period, in part due to the growth of Braintree that I noted above. But it's still impressive.
Perhaps more importantly, PayPal is able to produce lots of free cash flow, to the tune of an estimated $4.6 billion for all of 2023. After reinvesting some capital back into the business, management is fully focused on repurchasing the company's shares. These buybacks have steadily reduced the company's share count the past couple of years.
Investors can also have some confidence in case the economy does enter a recession. As of Sept. 30, PayPal had $15.4 billion of cash, cash equivalents, and investments on the balance sheet. This more than covers the $10.6 billion of long-term debt it carries and reduces financial risk.
Dirt cheap valuation
Investors interested in buying the stock can't ignore the current valuation. PayPal shares are 80% lower than their all-time high in July 2021. This was after the stock tanked 14% in 2023, not participating at all in the broader market's rally. This might be alarming to some.
But consider the forward price-to-earnings ratio of 11. That's about as cheap as the shares have traded for in the past three years. And it's a huge discount to the S&P 500. This beaten-down valuation provides investors with a favorable setup to achieve solid long-term returns.
There's a lot to like about PayPal. And the valuation might just be the main reason you scoop up shares today.
