Earnings season started off strong last week with JPMorgan Chase reporting record profits. However, the economy is still in flux, and it might be too early to celebrate the end of high inflation.
While the market digests many economic factors and geopolitical circumstances, it hasn't made any big moves so far in 2024. But whatever happens in the near term, the economy is going to get back on its feet at some point, and smart investors will be poised to gain.
One way to make that happen is to find beaten-down stocks that have high turnaround power -- for instance, PayPal Holdings (PYPL 2.90%). The stock is off 80% from its highs and has the platform, brand, and resources to make a huge comeback.
The leading digital payments company
Investors seem to be missing a major factor in PayPal's story. It has a lead so large that it would be hard for any of the numerous new digital payments companies to unseat it anytime soon.
Market share of online payment processing technologies worldwide. Image source: Statista.
It processed $1.5 trillion in payment volume over the past 12 months, and it has more than 430 million active members. That's more than the entire population of the U.S.
Digital payments volume in the U.S. is expected to grow at a compound annual rate of 14.3% and 11.6% globally through 2027, according to Statista. That's a lot of organic growth baked into PayPal's potential to grow over the next few years.
This doesn't mean that PayPal's future is guaranteed. Corporate history is littered with tales of once-dominant companies that fell apart and never recovered when technology changed.
But PayPal is still innovating and embracing new technology. There is an element of agility built into digital processes, and that makes it easy for PayPal to pivot to upgraded systems.
PayPal's biggest challenge right now is choosing a way forward. It has gotten so big and is in so many spaces that smaller companies are reaching into the cracks and making them wider while developing their own niches. Any company at a certain size is harder to steer, even with the agile digital focus.
At the same time, PayPal's size is part of its moat. Companies are used to working with it, and competitors would have to demonstrate why a potential client should leave what's already working to try something different. That's an uphill climb in favor of PayPal's continued success.
New CEO Alex Chriss has recognized the problems, and he's committed to finding a clear path forward. He didn't provide specifics on the third-quarter earnings call, his first as CEO and only two months into the job.
Where the opportunities are
PayPal's total membership is actually on the decline, and management has said that it was switching its focus and moving over its resources from generating new membership toward activating higher transactions per active user.
PayPal membership and transaction growth. Image source: PayPal Holdings.
These include net add-ons. That means while it's letting go of inactive members, it's also onboarding more active members. This should lead to continued growth in transactions per active customer and higher sales.
So, yes, there are risks. But with more than 40% market share, and its closest competitor at 20%, PayPal has some wiggle room to figure this out. It already made the strategic decision to find a new leader and bring a fresh outside perspective to growth. Expect Chriss to provide a more detailed plan for PayPal's next growth phase when the company reports fourth-quarter earnings on Feb. 7.
For now, investors can take advantage of PayPal's dirt-cheap valuation of 18 times trailing-12-month earnings, close to its lowest ever, and buy before it rebounds.
