Growth stocks rarely go on sale. When they do, it pays to pay attention.
Typically, there are only two ways to buy a growth stock at a discount. The first method is to invest before it becomes a growth stock. The second way is to invest when the market begins to doubt whether it is still a growth stock.
The second scenario is playing out right now with PayPal (NASDAQ:PYPL) stock. For years, the shares traded at a premium due to high revenue growth rates. But during the past three years, the shares have fallen in value by about 79% peak to trough.
If you ever wanted a second chance to buy a blue-chip growth stock, this is it.
PayPal stock is cheap for this reason
There are plenty of reasons to hate on PayPal stock. The biggest is a major slump in growth.
Since splitting from eBay in 2015, PayPal's revenue has grown by an average of 15% annually. Since 2022, however, revenue has grown by only 8% to 10% per year. This sizable slowdown in growth has crushed the stock's valuation. In 2020, when growth rates were above 20% per year, PayPal stock traded at a price-to-sales ratio of 15. Today shares trade hands at only 2.3 times sales.
PYPL Revenue (Quarterly YoY Growth) data by YCharts
PayPal's revenue growth rates haven't declined as much as its valuation multiple, suggesting that the market has treated the stock harshly. There's a good reason for this. While revenue growth rates remain positive, some fear that they will turn negative as soon as this year.
PayPal's revenue is directly tied to its user base. The company can boost revenue in two ways: by adding new users or by getting existing users to be more active with its platform.
On the first front, PayPal is facing a daunting headwind. After decades of user base growth, the company's total user count began to decline in the first quarter of 2023. Fewer users will inevitably pressure the company's payment volumes, directly affecting revenue growth and profits.
On the latter front -- getting existing users to engage with the company's platform more -- PayPal has actually fared quite well. The number of payment transactions executed with PayPal grew 12% in 2023, driven by a 14% bump in transactions per active account. So, PayPal is losing users, but its existing user base is actually using its services more. It is this hidden reality that makes PayPal stock a buy today.
Bet on the hidden reality
While the market remains concerned about PayPal's declining user base, other factors -- like rising payment activity from existing users -- should be your primary focus. Under the hood, PayPal is investing in new technologies and services that should keep revenue growth rates at or near the double digits for years to come.
For example, the company recently unveiled six new technologies designed to reinvigorate growth rates. While many of these innovations were arguably overhyped by management -- like the redesign of its mobile app and a new way for businesses to display their profiles -- one new feature, in particular, should get investors excited. That feature is Fastlane.
Right now, PayPal processes roughly 25% of the world's e-commerce transactions every year. That gives the company a huge amount of data to work with, more than most of its competitors. When a consumer goes to check out at an online retailer, for instance, there's a good chance PayPal already recognizes the user. It is this data that Fastlane leverages, allowing buyers to check out without needing to enter any additional payment information. PayPal claims this can reduce checkout times by up to 40%.
Innovations like Fastlane have kept PayPal's revenue growth above water. With rampant competition in the payments industry, it is unlikely that PayPal can reverse its user decline. However, if the company can continue to get existing users to use its services more, which can more than offset the negative pressure. After all, the company's user base has been shrinking for more than a year, yet revenue continues to rise thanks to increased user activity.
Keep in mind, too, that PayPal is a highly profitable business. The shares trade at just 16 times earnings, cheaper than the market overall. They also trade at a free cash flow yield of more than 6%. PayPal stock is still a growth stock despite what the market may think. And right now, investors can buy in at an unprecedented valuation.
