In a world where more and more transactions occur digitally, it would be logical to assume a company specializing in digital payments would be a massive winner for investors. However, PayPal (PYPL 2.90%) is only up 64% since its 2015 IPO, lagging the S&P 500's return over that same time frame.
More recently, PayPal's stock fell sharply after its Q4 and full-year 2023 results were released. The stock has recovered a bit after falling nearly 12% initially, but is still down 5% since the report.
This may all sound bad, but there's a lot of reason for hope. Let's dig in to see if PayPal is a buy after its post-earnings dip.
A transition year
One thing investors should keep an eye on with PayPal is its new CEO, Alex Chriss. After stepping into the corner office during the third quarter of 2023, Chriss has been working to get PayPal back on track after what has been a disappointing run for the company.
On PayPal's Q3 earnings call in November, Chriss made it clear he is looking for ways to improve the business. And in his comments on the Q4 call, Chriss laid out leadership and structural changes he believes will result in improved financial results. However, he also cautioned that 2024 would be a transition year to better position the company for growth in the years ahead.
More than meets the eye with a shrinking user base
At first glance, PayPal's shrinking number of active accounts is alarming, but there's important context to consider. PayPal ended 2023 with 426 million active accounts, a decrease of 2% compared to the end of 2022, and even with the end of 2021.
Certainly, the company would rather see this number increase, but it has been the focus of management for a while now to focus less on account growth and more on its high-engagement users. To that end, management pointed out that most of this churn was from unengaged accounts in less developed markets. It's unlikely these accounts were contributing much to PayPal's revenue or profits, so this churn probably isn't much of a concern.
Growth where it matters
To further prove the point about the minimal impact of account churn, we need to look no further than the number of payment transactions and transactions per active account.
|
Q4 2022 |
Q4 2023 |
Change |
|
|---|---|---|---|
|
Number of payment transactions |
6 million |
6.8 million |
13% |
|
Transactions per active account |
51.4 |
58.7 |
14% |
Data source: PayPal.
The fact that these metrics continue to grow double digits even as active accounts decrease is evidence that PayPal's focus on its most engaged users is a winning strategy.
It's also worth noting that these results are not outliers. Since the beginning of 2021, both of these metrics have consistently grown in the double digits in almost every quarter.
Profits and cash flow
Investors should also take note of the improvement PayPal has made with its profitability and cash flow over the past year. Operating income, net income, and free cash flow have all shown strong growth in 2023.
PYPL Operating Income (Quarterly) data by YCharts
While the company is guiding for net income to be relatively flat in 2024, management is expecting full-year 2024 free cash flow to be approximately $5 billion, which would be an increase of 2023's numbers. The company has committed to using the vast majority of this cash for stock buybacks, which is good news for shareholders. This would continue a trend of returning capital to shareholders that has already begun. Over the past three years, PayPal has reduced its shares outstanding by nearly 9%.
Paying a reasonable price
While it's true that PayPal's top-line growth has slowed to the single digits, the story on the bottom line is much more impressive. Still, it's unlikely the company will be a growth story in the near future.
That said, it's also not being valued like a growth company at this point. Shares trade for 2 times trailing sales and 16 times trailing earnings. Both of these multiples are near all-time lows.
For a profitable, cash-generating company that operates two of the most well-known digital payment platforms (PayPal and Venmo), buying shares at today's valuation seems more than reasonable. Any accelerating growth could help the stock soar, and the strength of the business's financials combined with the cheap valuation provides an adequate margin of safety.
