The former fintech leader still faces many long-term challenges.
PayPal‘s (PYPL 2.30%) The stock has rallied 41% this year as the digital payments leader has tried to put its struggles behind a new CEO. Is it still worth investing in anticipation of a long-term recovery? Let’s take a fresh look at their business model, their most pressing challenges, and their ratings to decide.
Image source: PayPal.
What are PayPal’s most pressing issues?
PayPal owns one of the world’s largest digital payment platforms, but much of its revenue comes from its former parent. eBay. That’s why I was worried when eBay replaced PayPal with the Dutch competitor Adyen as their preferred payment platform from 2018 to 2023.
The pandemic temporarily masked PayPal’s loss of eBay business as more consumers and businesses relied on digital payments, but its growth in active accounts, total payment volume (TPV) and revenue slowed slowed down after those winds dissipated. Inflation, rising interest rates, and other macro headwinds to consumer spending have exacerbated its slowdown in 2023.
|
Metric |
2019 |
2020 |
2021 |
2022 |
2023 |
YTD 2024 |
|---|---|---|---|---|---|---|
|
The growth of active accounts |
14% |
24% |
13% |
2% |
(2%) |
1% |
|
POS growth |
23% |
31% |
33% |
9% |
13% |
11% |
|
Revenue growth |
15% |
21% |
18% |
8% |
8% |
8% |
Data source: PayPal.
The biggest problem for PayPal is its inability to gain more active accounts. Its active accounts increased 1% annually to 432 million in the third quarter of 2024, but that was far below the 750 million active accounts it had planned to reach in 2025.
PayPal abandoned that long-term goal in early 2022, and is clearly struggling to gain new users as it faces strong competition from other payment platforms such as BlockApp Cash, Stripe, and Apple Pay off.
To offset this pressure, PayPal relied more on its peer-to-peer payment app Venmo and back-end payment platform Braintree to grow its POS. But it’s a double-edged sword because the two highest-growth platforms actually generate lower take rates (the percentage of each transaction it keeps as revenue) than their namesake platform. As a result, PayPal’s annual transaction fee has decreased every year since its spin-off from eBay in 2015.
What are PayPal’s plans for the future?
Therefore, in the future, PayPal needs to increase its average POS per existing account if it cannot win new consumers and businesses. Under Alex Chriss, who took the helm as its CEO last year, it developed new features – including the FastLane payment service, the Smart Receipts tool and the Cash Pass rewards program. It has also expanded its own buy now, pay later platform to counter disruptive challengers like He affirms and Block’s Afterpay, and used its own stablecoin PayPal USD to facilitate more cross-border transactions.
These initiatives could increase the viscosity of PayPal’s ecosystem, expose it to higher growth markets, and increase its average TPV per active account, but it also aggressively cut costs to grow its transaction margins – which they actually developed sequentially over the past two quarters. . It also bought back $5.4 billion of stock over the past 12 months to boost its earnings per share (EPS).
It could be tough for PayPal to balance its investments with its cost-cutting initiatives and acquisitions. But for the full year, it expects its adjusted EPS to rise from the “high teens” as its free cash flow (FCF) rises 30% to about $6 billion. It plans to return that cash to its investors via $6 billion in buybacks.
Should you buy PayPal stock now?
PayPal has survived the loss of eBay, weathered the headwinds of inflation, and is still squeezing more revenue from its existing users. From 2023 to 2026, analysts expect its revenue and EPS to grow at a compound annual growth rate of 6% and 11%, respectively. Its high-growth days are certainly over, but the stock looks reasonably valued at about 18 times next year’s earnings.
Yet it is not cheap enough to be considered a value stock. Therefore, I would not rush to buy PayPal stock at its current price below $87. Instead, I would personally buy higher-growth fintech stocks instead of this aging market leader before it overcomes its long-term challenges .
Leo Sun has positions in Apple. The Motley Fool has positions and recommends Adyen, Apple, Block, and PayPal. The Motley Fool recommends eBay and recommends the following options: long January 2027 $42.50 call on PayPal and short December 2024 $70 call on PayPal. The Motley Fool has a disclosure policy.