PayPal: Four Reasons Why the Stock Still Looks Attractive

PayPal's (NASDAQ:PYPL) stock has experienced a bumpy ride over the past five years. First, during the pandemic, when online shopping was boosted, the company saw incredible growth due to secular trends. From April '20 to July '21, the stock delivered extraordinary gains of more than 250%, and investors were fascinated with the price appreciation.

Later, the story completely switched as the company started reporting unfavorable KPIs, such as declines in active users and take rates. Furthermore, the net income margin dropped to half in FY '22 compared to the preceding year. Overall, all the gains achieved during the pandemic vanished, and the stock dropped from $310 to $50 over two years.

For several years, this stock drop led to many frustrations (and still does) among investors, as the stock has moved in a range and shows little signs of an apparent recovery after a drop of approximately -80%. For context, the stock needs to gain around 500% to return to the all-time high level, which seems like a recovery far from possible in the near term.

On the other hand, new PayPal investors who bought the stock in 2024 are more than happy with the performance. This year, PayPal has appreciated roughly 50% compared to 30% of the S&P 500. General market optimism and improvements in core KPIs, such as active accounts, that were once stugguling, , have catalyzed the stock performance.

PYPL Data by GuruFoucus

Despite the "slight" stock recovery compared to where it was, the fundamentals of this business still represent an opportunity, as the company keeps growing and the stock remains undervalued. To illustrate the situation, this article will discuss four reasons why PayPal's stock represents a bullish opportunity and could deliver a multi-bagger return in the future due to its low valuation.

#1 Reason: Ongoing Innovation

With $2.2 billion spent on technology and development in the first three quarters of 2024, PayPal has been innovating for more than a quarter of a century since its foundation. Kicking off the year, PayPal announced six technological advances and new features in its product offerings, integrating artificial intelligence to personalized customers' experiences and allowing merchants to close sales faster.

Three of the key new features are:

Fastline by PayPal: a one-click guest checkout where customers can avoid the pain of finding passwords, updating card information, and changing addresses.

PayPal Smart Receipts: uses predictive analytics to guess what a customer wants to buy next after realizing a purchase. Here, the receipt includes a personalized recommendation with a cashback offer.

Advanced Offers Platform: allows merchants to advertise to customers using insight into items that customers have already bought using PayPal.

In general, all the new features are innovations that aim to increase total payment volume. The third one is perhaps the most revolutionary since it opens a new revenue stream, which is advertisement. Here, PayPal has a competitive edge due to its enormous payment data and unique insights that are of value to merchants and differentiate from the data that social media platforms have, for example.

#2 Reason: Growth in Financials & KPIs

As commented before, some of PayPal's core KPIs deteriorated, making the stock price drop significantly. Nonetheless, some key financial metrics still represent the strong growth drivers that PayPal continues to have.

For example, areas in which the company has experienced great momentum are transaction revenues, EPS, number of payment transactions, transactions per active account, and total payment volume. On the opposite side, active accounts and take rates have been struggling.

Metric	2Q'23	3Q'23	4Q'23	1Q'24	2Q'24	3Q'24
Transaction (JO:TCPJ) revenue ($)	6,556	6,654	7,283	7,034	7,153	7,067
Number of payment transactions	6,074	6,275	6,798	6,505	6,580	6,631
Transactions per active account	54.7	56.6	58.7	60	60.9	61.4
Total (EPA:TTEF) payment volume ($)	376,538	387,701	409,832	403,860	416,814	422,641
Active accounts (in millions)	431	428	426	427	429	432
Total take rate (%)	1.94	1.91	1.96	1.91	1.89	1.86

Source: PYPL Q3 24

This means that although there are fewer new active users on the platform, the company still generates more transactions. The average active user of the past has been spending more through PayPal, and therefore, revenues are growing. In addition, active accounts have started to recover, and that has weighed positively on the stock price.

#3 Reason: Valuation

At the peak of the pandemic surge, PayPal's stock traded at a maximum of 108x earnings, which was absolutely out of context due to the company's time since its foundation and its growth prospects back then. However, the company did remain in a growth stage with higher revenues and net income, but growth rate expectations completely decayed.

Currently, the stock is significantly cheaper at 22x price-to-earnings, and there are many signs that it is undervalued. Below are three.

Before the pandemic, the stock traded between 65x and 44x in terms of price to earnings. Now, the stock trades at half the lower range of the pre-pandemic levels.

Other peers, such as Fiserv (NYSE:FI) and Block (SQ), are trading at higher multiples of 39x PE and 56x PE, respectively.

The PEG ratio, which assesses the PE multiple relative to growth expectations, is at 1.39x, which is -26% cheaper than the ten-year average PEG of 1.87x.

PYPL Data by GuruFoucus

#4 Reason: Technical Analysis

PYPL Data by GuruFocus

Even though this is the weakest reason, it can't be ignored. As commented, PayPal's stock has been trading between $60 and $100 over the past years. With the price appreciation obtained, especially during the second half of 2024, the stock sits close to the upper level of the consolidation. The con of this observation is that the $100 level has only been tested once, implying that the resistance is weak. Nonetheless, there is a clear consolidation that, based on theory, if broken, has the potential for the price to rise even further. If this occurs, later, the $100 level to potentially act as a support, better known as a role reversal.

Risks

The primary risks of PayPal are competition and adoption. Several years ago, PayPal was perceived by buyers as an extra layer of payment safety as card details weren't directly entered into an e-commerce shop. Many websites still display PayPal to generate a trust effect. Nowadays, people are more open to shopping online and are aware that it is more secure than it was previously perceived, giving PayPal's added value of higher trust to be less valuable . Furthermore, competition from companies such as Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOGL) Pay, among others, has partly replaced PayPal's attributes.

Finally, for omnichannel sellers, it is more convenient to have a single payment provider such as Stripe and Adyen (AS:ADYEN), which are both strong in offline and online payments. Currently, Zettle by PayPal does not have a large market share in POS systems.

Conclusion

In addition to the four bullish reasons mentioned above, management corporate actions have been planting seeds. As the stock has been undervalued for a prolonged time, management has done what is right, and that is using the free cash flow generation to repurchase shares aggressively.

In 2024 and 2023, PayPal spent roughly $11 billion in share repurchases, dropping the common shares outstanding from 1,136 million to 1,006 million. Ultimately, this repurchase and lower share count would pay off with more favorable market sentiments, boosting the company's stock price to its fair value faster as less share supply is available.

With US markets close to all-time highs, it is rare to find this type of investment opportunity within mega-cap companies trading below their fair value. Nonetheless, PayPal is one of those exceptions. Perhaps the stock might not recover to its level of 2021, but if it recovers to half of the $320 peak, it would represent a bagger from the current prices.

This content was originally published on Gurufocus.com