PayPal: From pricier to discounted and looking to rebound

PayPal (PYPL:US) used to dominate online payments, boasting impressive growth. Their Venmo app was a hit with younger users, and their core service was the go-to option for online shopping.

However, competition rose as Apple (AAPL:US) and Google (GOOGL:US) introduced their own payment methods, and other companies entered the space. As the pandemic online shopping boom slowed, PayPal's growth stalled. They shifted focus to less profitable ventures like white-label payment services, hurting their profit margins.

This led to a plunge in share price, dropping 80% since its peak in 2021. Now, with a market cap of c. $65.4 billion, investors question PayPal's future. Can the company adapt and regain its footing, or will it continue to struggle?

While PayPal's explosive growth phase might be over, that doesn't mean the company can't thrive. Under new CEO Alex Chriss, PayPal is undergoing a transformation. This includes streamlining operations and focusing on new efforts to improve profit margins and boost earnings.

The current stock price reflects a less optimistic view, similar to how some view traditional banks. However, even small improvements could trigger a rebound. As David Rolfe, CIO at Wedgewood Partners, puts it, "PayPal's valuation is like a fading coal mine, but it doesn't need much to be seen differently." In other words, even a slight shift in fortunes could lead to a significant stock price increase.

Despite acknowledging the need for change, PayPal's "innovation day" on January 25th fell short of CEO Chriss's ambitious goal of "shocking the world." While Chriss outlined plans to improve user experience, increase white-label profitability, and focus on core product innovation, these initiatives lacked specifics and concrete numbers. This unsurprisingly led to a 3.7% stock price drop.

However, there are still glimmers of hope. Analyst Tien-Tsin Huang of J.P. Morgan Securities highlights PayPal's commitment to faster innovation. Their new Fastlane service, designed to autofill checkout details, could significantly boost transaction completion rates. Huang remains optimistic, setting a $70 price target for the stock.

PayPal's latest earnings report in February was a mixed bag. While exceeding expectations for the previous quarter, the company's 2024 guidance of $5.10 per share fell short of both analyst estimates ($5.48) and previous projections ($7.20 in March 2022). Analyst Gus Galá of Monness Crespi Hardt called it "disappointing," but acknowledged it could be a strategic move to under-promise and over-deliver if their innovations succeed. He remains bullish with a price target of $80, a significant 28% increase.

PayPal's latest earnings report in February was a mixed bag. While exceeding expectations for the previous quarter, the company's 2024 guidance of $5.10 per share fell short of both analyst estimates ($5.48) and previous projections ($7.20 in March 2022).

The key takeaway might be PayPal's valuation.  Trading at 16.2x earnings, it's a far cry from its 2021 peak of 57.3x. Back then, PayPal was a high-growth disrupter challenging traditional banks. Now, it's a mature player in a competitive industry, reflected in its mid-size bank-like valuation.  Think of it this way: PayPal's current price tag makes it seem more like a predictable financial institution than a groundbreaking tech company.

While PayPal's growth prospects may not be as exciting as before, its valuation makes it a more tempting investment for some. Aswath Damodaran, a professor at NYU's Stern School of Business, puts it, "PayPal's growth might be less flashy, but its price is more appealing."

However, the company needs to prove itself. According to Wedgewood's Rolfe, PayPal is a "show-me story." Investors need to see if the company can stabilise profit margins and reignite growth. Their upcoming May earnings report will be a key indicator. Analysts expect $1.22 per share in earnings on $7.5 billion in sales. Beating these estimates could be the turning point for PayPal's stock.

nalysts expect $1.22 per share in earnings on $7.5 billion in sales. Beating these estimates could be the turning point for PayPal's stock.

Of course, exceeding expectations is a challenge. PayPal's valuation currently aligns more with traditional banks like U.S. Bancorp and PNC Financial Services Group, both trading at low multiples. This is a stark contrast to high-growth fintech companies like Block, which command a much higher price-to-earnings ratio.

In an effort to boost its stock price, PayPal plans to buy back $5 billion of its shares. This could be a smart move if the repurchase coincides with a rising stock price.

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