PayPal Holdings Inc. has undoubtedly endured a challenging period, with its stock price plummeting considerably from past highs. However, seasoned investors may be watching this leading fintech player with renewed interest, recognizing potential catalysts for a resurgence. Here’s a closer look at why PayPal still merits a place on your watch list.
Impressive Profitability in a Challenging Market
Though PayPal’s revenue growth has decelerated, particularly in terms of new account acquisition, one of our analysts underscores the company’s continued strength in an essential area – profitability. PayPal’s asset-light business model is a key driver of this consistent profitability. In 2023, the company demonstrated a resilient 17% operating margin, generating an impressive $5 billion in operating income.
Furthermore, the lack of heavy capital investment requirements means much of this profit can be returned to investors through dividends and share buybacks, a strategy PayPal has actively pursued, with over $12 billion dedicated to buybacks in just three years.
Loyalty and Growth Potential Remain
It’s true that PayPal’s user acquisition has faced headwinds, impacting top-line growth. Nonetheless, existing users are demonstrating steadfast loyalty. Transactions per active account have climbed steadily over the past three years. This trend reveals that even if new customers are proving harder to attract, PayPal enjoys substantial stickiness within its established user base. One analyst observes that by focusing on superior service and innovative offerings, PayPal could not only maintain its loyal customer base but potentially rekindle its growth trajectory.
A Discount Valuation Opportunity
Market sentiment has shifted against PayPal in light of its slowing growth, leading to a sharp stock price correction. Currently, PayPal’s price-to-earnings (PE) ratio stands at a modest 16.1, a substantial discount compared to its five-year average.
Of course, some argue that this lower valuation is justified, given PayPal’s reduced growth. They contend that without a return to its historic growth rates, there’s little reason to expect a return to previous valuation levels.
However, another analyst posits that it’s crucial to recognize that virtually all companies face cyclical challenges. Though PayPal has seen its user-base growth stall, it remains a formidable player with the potential to adapt. The recent appointment of a new CEO focused on revitalizing profitable growth bolsters this optimistic view. Despite recent setbacks, the fact that PayPal served a massive 426 million active accounts in 2023 is a potent reminder of its vast reach and market dominance.
The Outlook
PayPal’s current challenges present both risk and opportunity. If the company can successfully navigate turnaround strategies and regain its growth momentum, investors may be rewarded with potential share price appreciation. Even without a dramatic upsurge, a sustained focus on its already profitable business model could lead to long-term value creation for shareholders.
Investor Takeaway
While the outcome of PayPal’s transformation remains to be seen, one analyst concluded that its market position, robust profitability, and attractive valuation make it a stock worth monitoring closely. Astute investors might want to consider adding PayPal to their watchlists and carefully track its progress as the new leadership implements its revitalization plans.
