Once a pandemic-era darling, PayPal (PYPL +1.59%) stock has suffered over the last few years as competition in the payment industry heated up. Today, PayPal stock trades around $60 per share, and investor sentiment has probably never been lower.
With its new CEO, Alex Chriss, taking the helm earlier this year, PayPal is undergoing a strategic shift to reclaim its once-stellar growth trajectory. It'll take time to reinvigorate investor sentiment, but there is a good reason why PayPal could be an excellent opportunity for long-term investors today. Here's why.
NASDAQ: PYPL
Key Data Points
PayPal's falling margins have investors worried
Over the past several years, PayPal has faced increasing competition in the fiercely competitive payments industry. The company contends with rivals like Block's Cash App, Apple Pay, Google Pay, and other digital wallets. Despite this, PayPal continues to be the most-used digital wallet among U.S. adults, with a 71% penetration rate, according to Morning Consult.
However, this heightened competition has pressured PayPal's take rate, which is the percentage of transaction revenue it retains after fee-sharing with partners. In addition, its fast-growing unbranded checkout option, Braintree, has a lower take rate and has squeezed PayPal's profit margins.
Since going public in 2015, PayPal's gross margin, which reflects sales minus transaction costs, has declined significantly, dropping from 65% to 45%. This trend has raised investors' concerns about the company's growth prospects. Investors want to see rising margins, especially when PayPal stock has commanded a premium valuation for several years.
PYPL Gross Profit Margin (Quarterly) data by YCharts
Over the last five years, PayPal has seen impressive revenue growth, and net income has also rebounded after falling in 2022. Despite this robust growth, increasing concerns about its declining margins have tempered the stock performance in recent years, which now trades in deep value stock territory.
PYPL Revenue (TTM) data by YCharts
How PayPal plans to turn things around
Stepping into the role of CEO, Alex Chriss brings a wealth of experience from his tenure at Intuit, where he was an executive vice president and general manager for Intuit's small-business and self-employed group. Under Chriss's leadership, Intuit's small business segment saw impressive annual revenue growth of 23% compounded. Chriss aims to replicate this success by attracting more businesses and customers to the platform during this transition year for the company.
For one, PayPal aims to enhance its small and medium-sized business offerings with PayPal Complete Payments. This branded checkout option boasts higher margins and recently expanded into Canada, the United Kingdom, and 20 other European markets in the first quarter.
One goal of this platform is to improve its checkout experience, enabling one-click checkouts called "Fastlane," which can reduce checkout times by 40%. Early adopters, like BigCommerce, reported conversion rates soaring as much as 70%. The company plans to roll out Fastlane more broadly across the U.S. as the year goes on.
Image source: Getty Images.
Then there is the advertising side of things. PayPal is leveraging a trove of consumer spending data to help customers discover products and assist merchants in optimizing sales. Through advanced data analysis and artificial intelligence (AI), PayPal looks to help merchants make targeted discounts and personalized promotions to increase conversion rates.
To bolster its advertising endeavors, PayPal recently hired Mark Grether as Senior Vice President and General Manager of PayPal Ads. With over two decades in the industry, Grether's expertise was instrumental in growing Uber Advertising into a $1 billion business. With the market for global digital advertising projected to grow to $1.2 trillion by 2030, growing its ad business could be another huge component of PayPal's longer-term growth story.
Is PayPal a buy?
It'll take time for PayPal to turn things around. During its first-quarter earnings call, Chief Financial Officer Jamie Miller said that tailwinds wouldn't be as strong for the rest of this year and that expenses will rise as it rolls out its new products on a broader scale.
While investors don't necessarily need to rush to buy PayPal stock today, it is priced cheaply at 1.8 times and 13.2 times next year's forecast sales and earnings, providing an attractive entry point for patient investors who intend to hold the stock for the next several years.
