Paypal Stock: Bull vs. Bear


PayPal (PYPL 3.53%) was once the top name in financial technology. It’s still the dominant player in the fintech field, but it has lost its luster. Investors haven’t been pleased with its progress, and PayPal stock is down 27% over the past year.

There’s a lot of change taking place right now at the company as it strives to right its ship. Let’s go through the bull and bear cases for PayPal and see if its stock is worth taking a chance on.

An attractive customer value proposition

Parkev Tatevosian: My bull case for PayPal stock centers around the convenience the company adds to the digital buying process. People using PayPal can purchase more quickly and conveniently than those who are taking out their debit or credit cards for a transaction. Over the years, that customer value proposition has attracted hundreds of millions of customers to its platform and increased its revenues and profitability.

Indeed, from 2018 to 2022, PayPal’s revenue grew from $15.4 billion to $27.5 billion. (Its final numbers for 2023 are not yet available.) The company has done an excellent job of capitalizing on the network effects its business benefits from. When more consumers use PayPal, it incentivizes more merchants to accept it as a payment method, which in turn adds reasons for still more customers to join. Getting that virtuous cycle rolling was arguably the most challenging part of its business expansion.

Also from 2018 to 2022, PayPal’s profits expanded from $2.5 billion to $4 billion. Its asset-light business model allows for solid profits. Of course, challenges persist for PayPal as it tries to defend its market share against rivals offering similar services. I will argue, however, that its cheap valuation more than accounts for the risks PayPal shareholders face. The stock’s forward price-to-earnings ratio of 10 gives it an attractive risk-versus-reward proposition, to be sure.

Too big to steer

Jennifer Saibil: What’s happened to PayPal over the past few years is that it has become so big that it’s lost a clear path forward. It’s still the largest digital payments processor, with more than $1.5 trillion in trailing-12-month payment volume. But it’s increasingly losing market share to other players that are entering smaller niches and cracking them wide open. Alphabet‘s Google Pay and Apple‘s Apple Pay apps are easy to use, and companies like Klarna and Adyen have developed agile platforms for payment processing.

PayPal’s performance in recent quarters has been sluggish, and it is expected to report this week that revenue increased by a percentage in the mid-to-high single digits in the fourth quarter. It’s losing active customers, and although management says it’s letting go of its least-active customers to focus on generating higher revenue from those who are more active, it’s a metric to watch. Profitability has also been pressured.

PYPL Operating Margin (Quarterly) Chart

PYPL Operating Margin (Quarterly)na data by YCharts.

If PayPal continues in its current state without strong innovation and a guided path toward growth, its spot at the top of the fintech chain will be in jeopardy. It has taken several steps to correct its course, starting with bringing in a new outsider CEO and CFO. Management recently announced a new slate of services to “revolutionize commerce,” with rapid checkout and other value-enhancements for businesses. These are the right moves, and although they inspire confidence, PayPal is a company in flux, and that implies some amount of instability and risk.

Is PayPal a great stock to buy right now?

PayPal still has the opportunity to turn itself around and revitalize its growth trajectory. Value investors may want to take advantage of PayPal’s low valuation right now on the premise that it has the potential to get back to high growth. Risk-averse investors, though, may want to wait for it to start delivering more sustained strong performance before wading into PayPal stock.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Jennifer Saibil has no position in any of the stocks mentioned. Parkev Tatevosian, CFA has positions in Alphabet, Apple, and PayPal. The Motley Fool has positions in and recommends Adyen, Alphabet, Apple, and PayPal. The Motley Fool recommends the following options: short March 2024 $67.50 calls on PayPal. The Motley Fool has a disclosure policy.



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