PayPal Holdings (PYPL 1.61%) shareholders have not been having a good time, to say the least. This stock was once a highflier on Wall Street, but it has gotten crushed in recent years. The company's current market capitalization of $60 billion represents a massive 83% discount to its peak valuation of $363 billion, which occurred in July 2021.
Clearly, the market is souring on PayPal. But there's a lucrative opportunity here for long-term investors. Here are three undeniable reasons to buy this fintech stock like there's no tomorrow.
PayPal's financial position
There are lots of companies out there that aren't profitable or that carry unsustainable debt on the balance sheet. Fortunately, PayPal is not one of them. This business is in a strong financial position, which reduces risk for investors.
As of March 31, PayPal had $11 billion of long-term debt on the books. This compares quite favorably to the $17.7 billion of cash, cash equivalents, and investments it possesses. Throughout this prolonged period of inflationary pressures and higher interest rates, which might be pressuring discretionary spending activity, PayPal has the resources to invest in growth initiatives, regardless of what part of the economic cycle we are in.
This company is also extremely profitable. This is usually the case for any scaled payment platform. In 2023, PayPal generated $4.2 billion in free cash flow, with management expecting to produce $5 billion this year. Investors should be encouraged by the fact that the plan is to spend $5 billion on stock buybacks, which will only enhance earnings per share.
NASDAQ: PYPL
Key Data Points
PayPal's competitive strengths
It's smart to own companies that possess competitive advantages that can allow them to maintain or strengthen their industry positions over time. One of PayPal's notable characteristics is that because it operates a two-sided platform, it is able to collect data from both merchants and consumers that use its services. This leads to better fraud detection, a risk that has likely become more prevalent in the internet age.
PayPal's economic moat is supported by its network effect. Because this payment service is accepted seemingly everywhere online, consumers find value in signing up for an account. Merchants understand how big the user base is, so they are also inclined to be plugged into the PayPal system, unless they want to lose out on potential sales.
PayPal's stock is cheap
There's no sugarcoating the fact that this stock has gotten absolutely crushed. PayPal shares currently trade 81% off their peak price. That they haven't benefited at all from the stock market's latest rally might be cause for concern.
One might assume that this business is facing some serious financial troubles if they looked at the stock chart. But I discussed earlier that PayPal is in solid financial shape.
So, why have the shares taken such a beating? I can point to three likely culprits. Competition in the industry is fierce on both the consumer and merchant sides of the equation. That competition might be behind the next possible reason for PayPal's disappointing stock performance: a downward trend in the transaction margin over the past several quarters.
And the company's active account base, now at 427 million, is roughly the same as it was 27 months ago. After tremendous growth during the depths of the pandemic, a strategic shift to focus more on engagement and less on aggressively growing customer counts could be a worry for the market. After all, any company and its shareholders would want to see more users over time.
It's important to note, however, that PayPal has continued to grow its revenue and total payment volume, demonstrating much stronger engagement.
The concerns are certainly warranted. But I believe the stock, which trades at a dirt cheap price-to-earnings ratio of 14.4, fully reflects this pessimism. At the end of the day, PayPal is a hugely profitable business with key competitive strengths. The current valuation is yet another hard-to-ignore reason to buy the stock like there's no tomorrow.
