A lot of beaten down fintechs had bounce-back years in 2023 as the technology sector soared. But one of the oldest payment fintechs, PayPal Holdings (NASDAQ:PYPL), was not one of them. While some of its rivals, like Block, posted gains last year, PayPal finished 2023 down 14%, trading at around $60 per share.
Could this be the year that PayPal bounces back? There are some promising signs that things could be headed up.
As cheap as it gets?
PayPal was one of the first online payment companies when it launched in 1999 and was acquired by eBay a short time later as its payment provider until it spun off and went public in 2015. With the emergence of Venmo, in addition to its market leading PayPal platform, the company solidified its place as the market leader. In 2020, the pandemic fueled a surge in usage and the stock returned some 116%, and it continued soaring in 2021, reaching a closing high of $308 per share in July before crashing.
Since then, PayPal has lost about 80% of its value. The reasons are multiple, starting with the economy. Inflation and high interest rates have put a dent in consumer spending, which has impacted PayPal’s total payment volume (TPV). The end of the pandemic also had an effect as not as many people were forced to buy online anymore. In addition, there are increasingly more competitors in the space, which has eaten into PayPal’s market share. But there have been internal issues as well, as the company, during its massive growth phase, made too many acquisitions that didn’t pan out, which not only led to higher expenses and debt, but a lack of focus on the core business.
The good news is that PayPal is still by far the market leader in this space with about a 42% market share. The next largest competitor is Stripe at about 20%. However, this is down from roughly 50% in 2021, so it has lost share.
The other positive for investors is how cheap this growth stock is. While many other fintechs are overpriced as a result of the 2023 technology surge, PayPal is even cheaper than it was at the start of 2023. Its price-to-earnings (P/E) ratio is just 18 – half of what it was in December 2022 at the end of the bear market. Even better, its forward P/E ratio is only 10.9, and its five-year P/E-to-growth (PEG) ratio is 0.5. A PEG under 1 indicates a stock that is undervalued in relation to its anticipated earnings growth.
Could PayPal go lower? Potentially in the short-term, but its low valuation and other trends suggest that it could generate solid gains in 2024. The median price target among analysts is $70 per share, which would be a 19% increase over the current price.
Changes afoot
PayPal’s cheap price and market share are not the only factors that could drive growth. There have been major changes at PayPal in the past few months, starting with a new CEO, Alex Chriss, who joined in September, replacing long-time CEO Dan Schulman, and new CFO, Jamie Miller, who came over in November from Ernst & Young.
Chriss, on the third quarter earnings call, acknowledged that the company had been spread too thin and needed to refocus on expense management and targeted growth.
“I believe our cost base and complex structure is slowing us down. We have opportunities to accelerate our revenue growth while reducing our expenses, helping further drive operating leverage,” Chriss said on the call. “I am in the process of evaluating our most profitable growth priorities and aligning our resources to those priorities. We will become leaner, more efficient, and more effective, driving greater velocity, innovation, and impact for customers.”
PayPal saw TPV jump 15% in the third quarter and revenue rise 8%, but earnings per share dropped to 93 cents per share, from $1.15 in Q3 2022, due mainly to higher credit losses and a lower take rate, which refers to how much it makes per transaction. Among the many factors that impacted its take rate were pricing pressures and a decline in foreign transaction fees.
So, these are largely positive developments, but it will be interesting to hear Chriss’s plan for 2024 and the company’s guidance for the year ahead. That should be revealed in its Q4 and year-end earnings release, which comes out on Feb. 8. PayPal could also see some economic tailwinds in the back half of the year, should interest rates start to come down.
Overall, it has been a tough few years for PayPal, but it appears poised for a bounce-back year in 2024.
