PayPal (PYPL 0.75%) was a pioneer in the financial services industry. It has been at the forefront of digital payments for over two decades. And its user base has come to know the brand for its impressive user experience, innovative features, and focus on security. That hasn't always helped the share price, which is trading 81% below its all-time high.
After PayPal's disappointing performance, is now the right time to buy the fintech stock?
Image source: PayPal.
The company's fundamentals are in solid shape
PayPal was once a darling on Wall Street. After its public debut, the stock price roared 740% higher over the following six years until it reached a peak in July 2021. The market loved the business, mainly due to its incredible growth trajectory. However, investors haven't been as excited in recent years. This makes sense, as PayPal isn't growing as fast as it was in the past.
But the company's slowing growth doesn't justify a reason to panic. PayPal processed $458 billion in payment volume in Q3, rising 8% year over year. Ongoing digital payments adoption provides a durable tailwind for the company.
It's worth highlighting PayPal's profitability, which is improving. Operating income was up 9% year over year, faster than revenue growth. And the business generates significant free cash flow that management is aggressively plowing into share buybacks.
The company's network effect can't be overlooked. With a two-sided ecosystem consisting of 438 million active accounts, PayPal's value proposition increases as the user base expands. This supports its competitive position.
NASDAQ: PYPL
Key Data Points
PayPal shares trade at a compelling valuation
It's interesting how the valuations of even some of the most closely watched businesses can fluctuate wildly based on changes in market sentiment. PayPal stock traded at a nosebleed price-to-earnings (P/E) ratio of 109 in June 2020, its most expensive valuation ever. Today, it looks like a bargain, with shares selling at a P/E multiple of just 12. Mr. Market is giving investors a good deal.
The biggest point of uncertainty PayPal faces comes from competition. There are rivals on the consumer side, as well as peers that focus on merchants. And stablecoins might pose a threat, depending on their adoption curve. This might make it harder for PayPal to stand out, although it continues to grow payment volume, which is encouraging.
As it's been atop the electronic payments niche for quite some time, it's a good time to consider buying this stock. PayPal's fundamentals look to be in good shape. And the current P/E multiple possibly provides a powerful tailwind in the form of valuation expansion over the next five years.
