Fintech giant PayPal Holdings (PYPL 2.90%) is down 80% from its high, a decline not many companies come back from. It rings warning bells of disaster within the business, deteriorating fundamentals that scream: stay away.
But the company isn't sitting idly by. A new CEO is making sweeping changes across the PayPal to modernize its business, hoping to regain a sense of industry leadership that made it a household name over the past two decades.
So, is PayPal poised for a comeback? Or should investors avoid it as an investment?
Here is what you need to know.
What is PayPal's problem?
PayPal has seemingly fallen into a trap that happens when a company starts looking externally for growth. PayPal was one of the first online payment companies, which became the foundation for it to become a financial technology mega-cap stock worth $362 billion at its peak. But over the years, PayPal has used acquisitions to bolt on assets.
It built a family of brands, like Venmo for peer-to-peer payments and Honey for online shopping. However, the reality of PayPal is that the business has become fragmented and bloated. Gross profit margins have collapsed since PayPal was spun off from eBay, while SG&A (selling, general, administrative) expenses skyrocketed:
PYPL Gross Profit Margin data by YCharts
Additionally, the fintech industry has seen rising competition. PayPal has seen its market share leads in applications like peer-to-peer payments and buy now, pay later (BNPL) come under fire. Block's CashApp threatens Venmo, and Affirm, Klarna, and Afterpay are coming after PayPal in the BNPL space.
New leadership is making changes
In late September 2023, new CEO Alex Chriss took over the reins. Management recently announced it will lay off approximately 9% of PayPal's workforce to make the company leaner and bolster profitability. Additionally, PayPal will prioritize growing its branded checkout and leveraging its customer data better. Of course, these are high-level goals, and it will take time to translate them into financial results, which Alex Chriss acknowledged on PayPal's fourth-quarter earnings call.
Investors should know that PayPal's business isn't in dire condition like the share-price declines might have you believe. PayPal put up solid numbers for Q4, including 9% year-over-year revenue growth and a 9% reduction in nontransaction expenses. The result? An 18% year-over-year earnings bump.
PayPal may have gotten a bit stale, but it remains a prominent payments company that gives Chriss a big lump of clay to mold into a business that can sustain long-term growth.
What to look for
Cutting costs is the easy button to push when there's a new sheriff in town. Now, management's job begins; that's growing engagement with PayPal's brand. Active accounts declined by 2% year over year in Q4, and only about half of the active accounts made monthly transactions. Boosting engagement is what PayPal needs to do to grow over the long term, and that's where investors should consider focusing their attention.
The good news is that the stock is so cheap that success, even if imperfect, can create solid investment returns from here. Shares trade at a forward P/E ratio of just 12. Analysts expect roughly 11% annualized earnings growth over the next three to five years, making the stock a bargain today.
If management can successfully reinvigorate the business to the point that PayPal outperforms the expectations ahead of it -- look out. PayPal's market-beating days might not be over.
