Some investors might be surprised to hear that PayPal (PYPL 1.53%) was founded more than two decades ago, with a leadership team that included wildly successful entrepreneurs such as Peter Thiel, Steve Chen, Max Levchin, and Elon Musk. These people have gone on to create other valuable businesses over the years.
But it's safe to say that PayPal has been a disappointment for investors more recently. As of this writing, the stock has declined 74% during the last three years, compared to a 14% gain by the Nasdaq Composite index. That might prompt existing shareholders to dump their stakes, and lead those on the sidelines to avoid even considering the stock.
I believe that would be a mistake, because this might be a rare opportunity. Here are three reasons investors should seriously consider buying this well-known fintech stock.
Key competitive advantages
Don't let the poor share performance distract you from the fact that PayPal is still a successful enterprise. It currently has 428 million active users, including 35 million merchants. In the third quarter, its annualized total payment volume was an enormous $1.6 trillion.
That scale has resulted in an extremely profitable operation, as is the case with other large payments businesses. PayPal's operating margin has averaged 15.9% in the last five years, and if new Chief Executive Officer Alex Chriss drives greater efficiencies (as he plans to), then it's reasonable to expect that the company's profitability will improve.
As the operator of a two-sided platform connecting individuals and merchants, PayPal benefits from powerful network effects. Consumers want to sign up for its digital wallet because of how widely accepted it is. And the value proposition for merchants to accept PayPal is clear because it helps them attract a global customer base. This somewhat insulates the company from the threat of disruption from its rivals in the industry.
Another key competitive advantage has to do with data. Because it collects data from both sides of each transaction, PayPal can better detect fraud and boost authorization rates. This leads to more revenue for merchants.
NASDAQ: PYPL
Key Data Points
Growth potential
In Q3 2023 -- its most recently reported quarter -- PayPal's revenue increased 8% year over year to $7.4 billion. And management's last forecast for the full year was for sales to rise by about the same percentage. Total payment volume rose 15% in Q3, further showcasing that the company is posting solid growth despite economic uncertainty.
There's reason to believe that PayPal should be able to keep registering healthy gains for the foreseeable future. Because the company specializes in online transactions, the increasing penetration of e-commerce provides a powerful tailwind for PayPal.
Additionally, the proliferation of electronic payments could propel PayPal. Its services are available in more than 200 countries worldwide, so as cash transactions decline as a share of the economic activities in both developed and emerging economies, PayPal is in a favorable position.
Investors can't ignore the negative impacts of higher interest rates and inflationary pressures. PayPal's platform leans more toward discretionary purchases, which is what consumers cut back when times get tough. But given that the economy spends much more time expanding over the long term than it does in recession, PayPal is poised to perform well.
The stock is dirt cheap
Beyond its competitive advantages, strong financials, and growth potential, the most pressing reason to add PayPal to your portfolio now is its bargain valuation. The stock trades at a price-to-earnings ratio of 19. This represents a discount both to the S&P 500's average and PayPal's historical average of 48.
Based on the company's positive attributes, it's easy to see that the market's punishment of PayPal stock has gone too far. And this presents investors with a good buying opportunity.
