PayPal's (NASDAQ:PYPL) stock hit an all-time high of $308.53 on July 23, 2021. At the time, investors were impressed by the digital payment leader's rapid growth rates. The buying frenzy in growth stocks also amplified its gains.
But today, PayPal's stock trades at about $80. It lost nearly three-quarters of its value as the pandemic-related shop-from-home tailwinds dissipated, the macro and competitive headwinds intensified, and its growth in active accounts stalled out. Should investors still bet on PayPal as a long-term lifetime investment as the bulls look the other way?
Image source: Getty Images.
Why did PayPal's investors retreat?
PayPal faced three major challenges over the past six years. First, the company previously processed a lot of payments for its former parent company eBay (NASDAQ:EBAY). But in a five-year transition from 2018 to 2023, eBay replaced PayPal with its Dutch competitor Adyen (OTC:ADYE.Y) as its preferred payments platform.
Second, more competitors carved up the digital payments market. Apple and Alphabet's Google expanded their own mobile payment platforms, Block's Cash App grew rapidly in the peer-to-peer payments market, and new buy now, pay later (BNPL) platforms like Affirm lured away some of younger users.
Inflation, rising rates, and other macro headwinds also curbed consumer spending and its growth in total payment volumes (TPV). Those challenges further depressed PayPal's valuations as investors pivoted toward more conservative investments.
Chief Executive Officer Dan Schulman, who had led PayPal ever since its spin-off from eBay in 2015, also stepped down last year and was succeeded by Intuit's Alex Chriss. All of those challenges made PayPal a tough stock to hold as interest rates rose.
Why could PayPal's stock bounce back?
PayPal's growth accelerated in 2020 as the pandemic drove people to make more digital payments, and those tailwinds temporarily offset its gradual loss of eBay to Adyen. But in 2021 and 2022, its growth in revenue, active accounts, TPV, and adjusted EPS all decelerated as the boost from the pandemic dissipated and it faced tougher economic headwinds.
Metric | 2019 | 2020 | 2021 | 2022 | 2023 |
|---|---|---|---|---|---|
Revenue Growth | 15% | 21% | 18% | 8% | 8% |
Active Accounts Growth | 14% | 24% | 13% | 2% | (2%) |
TPV Growth | 23% | 31% | 33% | 9% | 13% |
Adjusted EPS Growth | 28% | 31% | 19% | (10%) | 24% |
Data source: PayPal.
But in 2023, PayPal's revenue growth slowed amid a loss of active accounts. It also cut costs to expand its operating margins and repurchased $5 billion in shares to boost its adjusted earnings per share (EPS) again.
In the first half of 2024, PayPal's revenue rose 9% year over year. The number of active accounts also grew sequentially in both the first and second quarters. The company didn't provide a top line outlook for the full year, but it expects adjusted EPS to rise by the "low to mid-teens" percentages from $3.83 per share in 2023.
Analysts on average expect PayPal's adjusted EPS to rise 16% in 2024 and 9% in 2025. Based on those expectations and its current price of $80, it looks reasonably valued at about 17 times forward earnings. If the macro environment continues to warm up as interest rates decline, more investors might pivot back toward PayPal as a turnaround play.
PayPal's high-growth days could be over
PayPal's business is clearly maturing, and it probably can't significantly expand its user base beyond the 429 million active accounts it held in its latest quarter. Its growing dependence on Venmo and Braintree units, which generate lower take rates than its namesake platform, could continue to erode its long-term gross margins. Its transaction take rate, or the percentage of each transaction it keeps as revenue, have also declined every year since its spin-off from eBay.
On the bright side, the company is still aggressively rolling out new features -- including its streamlined checkout service FastLane, its Smart Receipts tool, and its Cash Pass rewards program -- to lock in its remaining users. It's also been expanding its own BNPL platform and facilitating more cross-border transactions with its PayPal USD stablecoin. Those initiatives could gradually boost its TPV to offset its dismal growth in active accounts.
But during the past 12 months, PayPal's insiders still sold nearly twice as many shares as they bought. That chilly insider sentiment suggests its new projects won't boost its near-term revenue or earnings growth.
It probably isn't a great contrarian investment yet
PayPal's business is stabilizing, and its stock might gradually rise as the macro environment improves. But it still doesn't look like a stock that will set you up for life with predictable long-term growth and multibagger gains during the next few decades.
For PayPal to do that, it needs to keep its active accounts, stabilize its transaction take rates, and meaningfully expand its ecosystem. Unless it checks those boxes, it could continue to underperform most of its higher-growth fintech competitors.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Leo Sun has positions in Apple. The Motley Fool has positions in and recommends Adyen, Alphabet, Apple, Block, Intuit, and PayPal. The Motley Fool recommends eBay and recommends the following options: short December 2024 $70 calls on PayPal. The Motley Fool has a disclosure policy.
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