The pandemic accelerated the trend to digital payments, and PayPal (PYPL 1.14%) was a big winner. The company saw staggering growth and topped $1 trillion in total-payment volume in 2022, and the stock traded at a sky-high valuation.
However, the past few years have challenged the fintech. Discretionary spending dropped amid high inflation, and its staggering growth slowed. The company shifted its strategy, hired a new CEO, and is working to reinvent itself and hold on to its leadership position in the payment space. The 80% decline could be an excellent opportunity to scoop up shares of the fintech on the cheap. Here's why.
Image source: Getty Images.
PayPal had a rapid rise and fall in recent years
PayPal's growth during the pandemic cannot be understated. Over two years, the company added 122 million accounts, grew revenue by 43%, and surpassed $1 trillion in total-payment volume. During an investor presentation in 2021, former CEO Dan Schulman told investors the company expected to double its user base to 750 million accounts -- a bold forecast indeed.
At its peak, investors optimistically priced PayPal stock at over 109 times earnings and nearly 17 times sales. However, the growth proved to be unsustainable. Customers returned to more normal spending habits in the years following the pandemic, and heightened inflation weighed on discretionary spending. Also, eBay transitioned away from PayPal to Adyen as its preferred payment platform, putting even more pressure on growth.
NASDAQ: PYPL
Key Data Points
The fintech's strategy shift and leadership reshuffling
Under Schulman, PayPal shifted gears and focused on getting more from existing customers. This meant it would focus on getting more transactions per active account, which would be a more cost-effective approach to growing revenue and net income. This shift in strategy had investors less than excited about the stock, which has declined over 80% from its peak price of $310 per share in 2021.
Last year, Schulman announced he would retire by the end of the year. After a months-long search, the PayPal board selected Alex Chriss as its next CEO and president. Chriss is a longtime industry veteran who previously worked as an executive vice president and general manager for Intuit's small-business and self-employed group. During his five years leading the small-business segment, revenues grew by 23% compounded annually.
PayPal holds a dominant position in the global payment-processing market, which it will look to build on
While PayPal stock is down, the company is operating from a position of strength. According to data from Datanyze, PayPal has a 40% share of the global payment-processing market. Its products include branded and unbranded checkout options, allowing businesses to accept online or in-app payments.
Image source: Statista.
Braintree, which is the unbranded option, is a rapidly growing part of PayPal's business. In the third quarter, total-payment volume through Braintree grew by 32% and has been a key driver of the broader company's total-payment volume growth.
However, one criticism is that the Braintree business has lower margins, and its growth pressures its total profit margin. One part of PayPal's strategy to improve its profit margin is to improve its small and medium-sized business offerings with PayPal Complete Payments.
In a recent interview with CNBC, Chriss said innovation has been slow for the fintech and that "2024 will be a transition year for us." Chriss said PayPal would do a better job of leveraging artificial intelligence on its trove of data to improve conversion rates for merchants and help them connect better with consumers.
If PayPal can successfully scale its PayPal Complete Payments, it could boost its profit margin and eventually provide additional offerings for small and mid-sized businesses, which was Chriss's specialty at Intuit.
PayPal stock is near its cheapest valuation ever
Analysts haven't shown any love to PayPal stock. Five analysts have downgraded the company since December due to pressure on its margins and increased competition from Apple Pay, arguing that Paypal is moving too slowly on strategic initiatives.
The share price reflects this pessimism. Today, PayPal stock is priced at 9.9 times its forward earnings and 1.9 times forward sales, well below its historical average. The stock is near its cheapest valuation and is less than half of the S&P 500 forward price-to-earnings (P/E) ratio of 22.
PYPL PE Ratio (Forward 1y) data by YCharts.
PayPal continues to post solid growth. In Q3, total-payment volume grew another 15% while revenue increased by 8%, and it generated over $1 billion in free cash flow. The company has work to do to improve its margins, and under new CEO Alex Chriss, I'm optimistic that it can make good on these initiatives.
Investors will learn more about PayPal's vision for the future when it hosts its innovation day on January 25. However, given how pessimistic investors have been on the stock, I think today is an excellent opportunity to scoop up shares of this fintech on the cheap and add to them over time, as long as it executes on its strategy.
