PayPal's (PYPL +1.47%) stock price has fallen and can't get up.
The fintech stock peaked in 2021 but has dropped 80% from those highs. Investors are skeptical of PayPal's future amid ruthless competition, much of which is younger, fresher, and dangerously innovative. PayPal hired Alex Chriss as CEO last year to right the ship and rejuvenate the company's growth.
PayPal's recent second-quarter earnings showed that the company still has a pulse, and its new CEO is starting to create positive change.
Here are three things I loved about PayPal's quarter and why the stock is a strong buy today.
1. PayPal is seeing margin improvement
PayPal's business includes multiple products and services, but its core business is branded and unbranded payment processing. These two segments represent over 60% of total payment volume. Competitors like Adyen and Stripe have emerged, challenging PayPal and pressuring its gross profit margin (revenue minus transaction costs) over time. You can see below just how significant the decline has been over the past decade:
PYPL Gross Profit Margin data by YCharts
Cutting costs can improve a business's operating margin, but you're still swimming against the current if your pricing steadily deteriorates. PayPal's gross margin improved over 70 basis points from Q1 to Q2. That has to become a sustained trend, but seeing the pivot is encouraging. Chriss is renewing PayPal's focus on product innovation, which will hopefully bring higher-margin revenue over time.
2. PayPal reported increased customer engagement
PayPal has a massive user base it can still get more from. The company has 429 million active users, but just 222 million use PayPal's products every month. Getting users to transact more with PayPal is arguably the most straightforward path to growing the business.
The good news? PayPal's monthly active users grew 3% year over year in Q2, up from 2% growth the prior quarter and 1% in Q4 2023. That's three consecutive quarters of accelerating user engagement now. Peer-to-peer payments app Venmo is helping drive this; the app's monthly active users increased 5% year over year in Q2. PayPal's monthly active users transacted almost 61 times per month in Q2, an 11% increase from a year ago.
Total active accounts were flat in Q2, but I would argue that total account growth is a longer-term goal. There is so much value to unlock across PayPal's business by focusing on the low-hanging fruit already in the ecosystem.
3. Guidance raised across the board
Ironically, PayPal never stopped growing despite competitive pressure:
PYPL Revenue (TTM) data by YCharts
Payments are in a global growth uptrend as consumers move away from cash worldwide. So, instead of looking at revenue going up and assuming PayPal is doing well, investors should look at how the business is performing against the expectations management sets.
PayPal did well enough in Q2 that management raised its 2024 guidance virtually across the board. Chriss raised guidance for transaction margin dollars, earnings per share, and free cash flow, and plans to increase share repurchases. The jump in anticipated earnings growth was massive, going from mid- to high-single-digit growth to the low- to mid-teens. That speaks directly to management's confidence in how things are going.
PayPal is a compelling stock idea today
PayPal stock initially soared on earnings, but the broader market had a rough couple of days and reclaimed much of those gains. Regardless, PayPal is a bargain today.
NASDAQ: PYPL
Key Data Points
Management now calls for earnings per share of almost $4 per share in 2024. The stock trades at roughly 15 times those earnings, a tremendous discount to the S&P 500, which trades at over 22 times earnings today. PayPal has historically traded at a premium to the market, averaging an earnings multiple of 45 from 2014 to 2020.
PayPal must still prove itself, but the momentum inside the business is positive. The stock could generate fantastic investment returns by simply trading on par with the S&P 500 again. The stock could hover at 15 times its earnings, and growth alone would generate double-digit investment returns.
It's this compelling risk-reward fat pitch that makes PayPal such a no-brainer today.
