PayPal shares: buy, sell or keep?

PayPal‘S (NASDAQ:PYPL) The stock has fallen about 80% over the past three years. The digital payments leader lost its luster as its pandemic-led growth spurt ended and it faced tougher macroeconomic and competitive headwinds. Dan Schulman, who has led the company since its spin-off from eBay in 2015, also retired last September and was replaced by Intuitive Executive Vice President Alex Chriss.

Under Chriss, PayPal has expanded its ecosystem with new services while carefully controlling expenses. It’s a difficult balancing act, and the bulls don’t seem too keen to pounce on it. However, PayPal’s July 30 quarterly report beat analysts’ expectations on revenue and profit and suggested that the business is starting to stabilize. Let’s take a closer look at those numbers and examine the main reasons to buy, sell, or hold this out-of-favor fintech stock.

The most important figures

PayPal faces three long-term challenges. First, eBay has replaced PayPal with its Dutch rival. Adyenas the preferred payment platform during a five-year transition period from 2018 to 2023. Second, PayPal faces strong competition from large technology companies, other digital payment providers and buy now, pay later (BNPL) platforms. Finally, higher interest rates and other macroeconomic headwinds are curbing consumer spending generally.

PayPal’s active accounts peaked at 435 million in the fourth quarter of 2022 but declined sequentially throughout 2023. However, active accounts increased sequentially again in the last two quarters as revenue growth stabilized.

Data source: PayPal. YOY = Year over year.

Most of this recovery was driven by PayPal’s consumer-facing app and its peer-to-peer payments platform Venmo. For the third quarter, PayPal expects revenue to increase by a mid-single-digit percentage, while adjusted earnings per share (EPS) will increase by a high-single-digit percentage.

For the full year, PayPal expects earnings per share to increase by a low- to mid-teens percentage on an adjusted basis and by 1 to 4 percent on a generally accepted accounting principles (GAAP) basis. The company did not provide revenue guidance, but analysts on average expect growth of 7 percent.

The reasons to buy or keep PayPal

PayPal’s sequential growth in accounts suggests that its new features – including its streamlined FastLane checkout service, Smart Receipts tool and Cash Pass rewards program – are attracting more users. To keep up with its more agile rivals, the company has expanded its own BNPL platform and enabled more cross-border transfers using its own PayPal USD stablecoin.

Adjusted operating margin increased 231 basis points year over year and 30 basis points quarter over quarter to 18.5% in the second quarter as expenses were cut. As a result, adjusted free cash flow (FCF) — what’s left of cash flow after investments — rose 31% to $1.14 billion. The company plans to use much of that money for major buybacks. It has already bought back $5 billion worth of stock in the past 12 months.

PayPal had $18.3 billion in cash, cash equivalents, and investments on its balance sheet at the end of the second quarter, giving the company plenty of room to expand with further investments and acquisitions.

And at about $64 per share, PayPal’s stock trades at less than 16 times the midpoint of its full-year GAAP EPS guidance. This low valuation should limit the company’s downside as it stabilizes its business.

The reasons for the sale of PayPal

While PayPal’s numbers are improving, its transaction rate (the portion of each transaction that is retained as revenue after splitting fees with credit card processors and other payment networks) continues to decline.

On an annualized basis, that figure fell from 2.89% in 2015 to 1.76% in 2023 and has never improved year-over-year. In 2024, that figure dropped to 1.74% in the first quarter and 1.72% in the second quarter. This decline was caused by two headwinds: competition from other payment platforms and a higher transaction mix from Venmo and its back-end software Braintree, both of which have lower margins than the main payment platform.

To counteract this pressure, PayPal needs to continue to cut expenses and buy back shares to increase earnings per share. In other words, the company is still in the development phase and has no room to grow. At this level, it could be a good value stock, but it may not be an attractive investment compared to higher-growth fintech companies.

Is it time to buy, sell or keep PayPal?

PayPal’s business is not on the brink of collapse, but I wouldn’t buy the stock until the adoption rate stabilizes. If you already own PayPal, I don’t think you should sell it at these historically low valuations. So the best move right now would be to just hold onto PayPal and instead focus on higher-growth fintech stocks or cheaper value stocks in this volatile market.

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Leo Sun does not own any of the stocks mentioned. The Motley Fool holds positions in and recommends Adyen, Intuit, and PayPal. The Motley Fool recommends eBay and recommends the following options: short September 2024 $62.50 calls on PayPal. The Motley Fool has a disclosure policy.

PayPal Stock: Buy, Sell, or Hold? was originally published by The Motley Fool