Shares of financial technology (fintech) pioneer PayPal (PYPL 1.69%) are down more than 40% over the last five years and are down 80% from their all-time highs. Before I explain the company's recent announcement that could finally help turn things around, allow me to explain some of the problems it's dealing with.
First, PayPal is struggling to find top-line growth right now. The company's revenue was up only 8% year over year in 2023. And the first quarter of 2024 was only marginally better with 9% growth. That's far lower than what its investors are accustomed to.
Second, this meager revenue growth for PayPal has come at the expense of its profit margins. In addition to the fintech services most consumers are used to, the company also offers unbranded checkout products behind the scenes. And prices for these products were lowered to gain market share.
Looking at both factors combined, PayPal is struggling to grow and what little growth it's had lately has been a wash from a profitability perspective. This is illustrated by free cash flow in the five-year chart below.
PYPL Free Cash Flow data by YCharts
If PayPal can fix this problem of profitable growth, then it would be well on its way to improving returns for shareholders. And that's where management's recent announcement comes in.
Management's big move
PayPal's management just announced that it's launching its own advertising network, which could be quite valuable.
I won't dig up the history of it all. But suffice it to say that PayPal has long talked about its treasure trove of consumer-spending data. And there's no doubt that the company indeed has something valuable. After all, it has 427 million active users and it processes over $1.5 trillion in payments annually. There are useful data points buried in here somewhere.
NASDAQ: PYPL
Key Data Points
PayPal knows what people want to spend money on. And hundreds of millions of people are already active on the platform, giving the company an opportunity to display relevant ads galore.
PayPal is bringing in Mark Grether from Uber Technologies (UBER 0.45%) to lead its new ads business. It's important to note that Grether led Uber's ad business from its start in October 2022. Now, less than two years later, Uber's ads are already a billion-dollar business.
PayPal is certainly bringing in an experienced veteran to build its advertising business. And Grether might be poised for even better success this time. Not only does he now have greater experience from leading Uber, but PayPal's user base is also bigger. When Uber started out with ads, it had monthly active users of 122 million. By comparison, PayPal had 220 million monthly active users as of Q1.
I'll stop short of saying that ads have made all of the difference for Uber's profits -- there are a lot of moving pieces with a business of its size. That said, its free cash flow undeniably began to spike around the time ads were launched.
UBER Revenue (TTM) data by YCharts
I believe this should be good reason for cautious optimism from PayPal's shareholders. I say "cautious" because the company has talked about better leveraging its data for a long time with seemingly little to show for it. But maybe now is finally the time under its relatively new leadership.
I say "optimism" because I already established that lack of profit growth has been a big reason that PayPal stock has been down in the dumps. The company has a valuable consumer dataset, a large active user base, and an experienced industry veteran tasked with profiting from it through advertising. That's indeed reason to be optimistic.
As of this writing, PayPal stock trades at less than 14 times its free cash flow -- its cheapest valuation ever. This cheap valuation suggests that many investors have given up on PayPal stock. Therefore, this could be a situation where its profits rapidly improve and the stock starts rising before the majority of investors understand what's happening.
If PayPal succeeds with ads, investors will regret not noticing this development sooner.
