Dark Horse or Lost Cause - A Deep Dive into PayPal, Inc.

The stock market has always been a place for exciting stories – stories about glorious winners who generate billions of dollars for their shareholders and, on the other side, sore losers who fall so deep that they destroy fortunes and entire livelihoods. The stock of PayPal exemplifies both extremes.

https://finance.yahoo.com/quote/PYPL/history/

Depending on when you bought and sold, you could have realized gains well above 200%, or suffered losses of more than 80% – all within a short period of 2-3 years. Like many others during the pandemic, I became really excited about the stock market. This enthusiasm was sparked by the unprecedented amounts of money that central banks injected into the economy, pushing equities to chase all-time highs over and over again. For “YOLO investors,” it was the era of meme stocks and cryptocurrencies. On the more serious end, both retail investors and Wall Street fell in love with the FAANGs, Tesla, and amongst others, PayPal. To this day, these stocks remain on my watchlist, and while most of them have reclaimed their strength climbing to new all-time highs, I find myself pondering why PayPal fell so hard and never recovered. Stories like this intrigue me, and as an investor inspired by Benjamin Graham and Warren Buffett, I wonder if PayPal can now be considered a value stock, or if it's a lost cause altogether. So, what is going on beyond the stock price? Is PayPal a good buy right now?

First, let us take a look at the top line. Surprisingly, revenues just hit a new high in 2023 with 29.7 billion USD.

Source: PayPal 10-K Filings
https://www.multpl.com/s-p-500-sales-growth/table/by-year

However, the growth decelerated, which could partly explain why PayPal’s stock declined.
During the sharp run-up, revenues grew by more than 20.7% and 18.7% respectively. That growth was priced into the stock price back then, and once PayPal could not deliver these numbers anymore, its stock price fell along with the growth. And yet, compared to the S&P 500, PayPal delivers similar growth in 2022 and 2023. It could make investors hope that the worst is over here and that PayPal has reached a bottom from which it can climb back up to old highs and maybe even new all-time highs.

But what about the bottom line? Let us look at earnings per share to see if there are valuable insights to find.

Here, we can see another reason why the stock price started to fall in late 2021. Earnings per share declined from 3.55 USD in 2021 to 2.10 USD in 2022. That is a decline of roughly 40% in earnings and it might be the main reason for many investors to get out of the position altogether. The effect was so persistent that even a new high of 3.85 USD in 2023 had little to no effect on the stock price.

So, let us compare PayPal with its competitors to see if the stock is actually undervalued or if it is appropriately priced. The variety of offerings differs from company to company, and there is no company with 100 percent overlap. However, we have identified four similar publicly traded companies.

The results of that comparison are mixed. From a valuation perspective, PayPal consistently ranks as the lowest or second lowest in most categories, offering investors good value for the price paid per share. However, PayPal delivers lower margins compared to Intuit and Wise. While Intuit trades at a hefty valuation, which may not be suitable for cautious investors, Wise is anticipated to bring higher profits and growth in the future, according to the PEG ratio. From our perspective, Block, Intuit, and Shopify might appeal to risk-seeking investors. PayPal, in retrospect, seems more suitable for conservative investors, while Wise occupies a middle ground with attributes appealing to both investment styles.

Now that we have looked at the competitors, let us take a look at PayPal’s valuation compared with the S&P 500. The P/E ratio is the best way to compare the company with the index of the 500 most valuable US companies.

https://www.macrotrends.net/2577/sp-500-pe-ratio-price-to-earnings-chart
https://www.zacks.com/stock/chart/PYPL/fundamental/pe-ratio-ttm

The chart shows us that PayPal not only came down from its grotesque valuation but it actually went below the P/E of the S&P 500. It might be the best argument for an investment in the stock since its revenue growth is higher than that of the S&P 500 at the moment, making PayPal indeed a value stock. So, what is holding us back from investing large sums of money into PayPal?

Short answer: uncertainty. There are certain risks associated with the industry in which PayPal is operating. If the company cannot keep pace with rapid technological developments to offer new and innovative products and services, the use of PayPal, and consequently its revenues, will decline. But that has always been the case and so far, the company has a good track record of keeping up with the fast-changing fintech landscape through diversification, R&D, and acquisitions. Our research has shown a way more acute and pressing issue; it is the user base.

The number of active accounts has been stagnating, and even slightly declining, since reaching a record high in 2022. To grow revenues, PayPal has managed to increase both the number of transactions per account and the value per transaction, thereby making existing users more valuable.

However, this is not necessarily good news. It makes PayPal more dependent on existing customers and significantly more vulnerable to external economic forces. For instance, recessionary pressures could lead customers to spend less, resulting in a decline in Total Payment Volume (TPV), especially since PayPal is not generating new users.

And that leads us to the conclusion of this article.

On the positive side, PayPal’s valuation has significantly dropped from its peak, and when compared to many of its competitors, and even the stock market in general, an investor really gets value for their money without relying on exaggerated promises of future growth. PayPal has been profitable for years now, and revenues just hit a new high.

On the other side, the user base presents a real issue for the company. Stagnating or even shrinking active accounts will significantly limit PayPal’s potential for growth. In an ever-changing fintech environment, heavily influenced by network effects, users may eventually switch platforms. The new CEO, Alex Chriss, needs to find a way to grow active accounts, or new all-time highs will be very unlikely.

Unfortunately, PayPal is neither a dark horse nor a lost cause which makes it hard to conclude with a final judgment. Whether or not PayPal is an attractive investment depends on your investment strategy. It will add value to your portfolio if you’re looking for a profitable, low P/E stock. At the same time, a dramatic rise in the stock price cannot – and should not – be expected.

The mixed signals coming from this stock are probably best reflected in its trading volume. Not only are we grappling with what the right price for PayPal might be, but Wall Street traders themselves are also divided.

Aside from the colossal selloff in late 2021 and early 2022, trading volume has actually increased compared to the massive ascent during the pandemic. Interestingly, traders haven’t abandoned the stock; rather, they are unsure or disagree on where its price should be.

It is clear, however, that the stock cannot keep up with the current momentum in the market and that without a magnificent turnaround, we will not see new all-time highs any time soon.

Thank you for reading!

Michael Mentis

Disclaimer: The information provided here is for general informational purposes only and does not constitute financial advice. Always consult with a qualified financial advisor before making any investment decisions.

Dark Horse or Lost Cause - A Deep Dive into PayPal, Inc.

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