PayPal (PYPL 2.90%) has been one of the worst performers of the past couple of years. After the company experienced massive growth during the early days of the COVID-19 pandemic, its numbers started to slow down quickly, and investors realized that management's goal of reaching 750 million active users in the next few years was unrealistic.
As a result, the stock fell dramatically and remains down by more than 80% from its 2021 high. It's certainly down for a reason -- but at a valuation of about 12x free cash flow and a brand-new CEO who's already being aggressive about finding future growth opportunities, it looks like a steal for long-term investors.
PayPal's business is a massive cash machine
In many ways, PayPal's business is performing extremely well. Total payment volume grew by 15% year over year in the fourth quarter, and the company beat expectations for both revenue and earnings. Operating margins improved significantly, as well, thanks to a renewed focus on expense controls.
While PayPal's active account total declined by 2% over the past year, the number of payment transactions grew by 13% as the company's strategy focused on serving its most engaged users.
As for profitability, PayPal produced $4.55 billion in adjusted free cash flow for the full year, and thanks to share buybacks, the outstanding share count is 4% less than it was a year ago. PayPal anticipates $5 billion in free cash flow in 2024. Make no mistake -- this business is a highly profitable one.
The future is a big question mark
The biggest point of uncertainty (and the reason the stock dropped 10% after earnings) is the future. The company's growth essentially stagnated as the pandemic started to wind down, and PayPal's earnings guidance during its fourth quarter report was a big disappointment -- even though management is calling for $5.10 per share in adjusted earnings.
However, it's important to realize that this was Alex Chriss' first quarter as PayPal CEO, and the former Intuit executive is already taking steps to set the business up for the future.
Just a couple of weeks ago, Chriss unveiled several artificial intelligence (AI)-driven initiatives, including a completely new PayPal checkout experience, and also announced a plan to reduce the company's workforce by 9% to improve efficiency. In the company's earnings release, Chriss referred to 2024 as a "year focused on execution to position PayPal for long-term success," but it's fair to say that investors remain skeptical.
The price is right
At the current stock price, PayPal trades for about 12x free cash flow, a remarkably low valuation for a highly profitable industry leader. Management seems to agree, as the company plans to spend another $5 billion on buybacks this year to take advantage.
However, PayPal isn't using all of its money on repurchases. It has $17.3 billion in cash and short-term investments that give it the financial flexibility to pursue growth opportunities, as needed.
I started adding PayPal shares to my portfolio in late 2023, but it remains a rather small position. However, if the current price holds, I plan to change that in February and will be adding shares aggressively.
