PayPal Shares Are Down 73% Since 2021: Opportunity Knocking for Value Investors?

Since reaching its all-time high in June 2021, PayPal’s share price faced a >70% downfall. This decrease is associated with various factors that ultimately guide the company’s current economic situation. Paypal benefited from a surge in digital payments from the pandemic.

As with many companies during the pandemic, investors substantially bought into the stock thinking growth would persist for many years. But growth has slowed down, competition has increased, and higher interest rates pulled the prices of tech stocks down, including PayPal. So, there are some particular attributes to consider while evaluating the future potential of a stock especially when that stock in question is experiencing a significant drop. What to and what not to consider?

PayPal’s financial fundamentals

Despite its challenges, PayPal has shown a strong financial foundation that may appeal to the investors seeking value more than growth. For the second financial quarter of 2024, The company reported a revenue of $7.3 billion which is a rise of 7% from the previous year. Revenues rose from $27.5 billion in FY22 to $29.8 billion in FY23. Total payment volume was $1.53 trillion, which is an increase by 13% in FY23.

PayPal generated a solid $1.3 billion in free cash flow in Q2 2024, showcasing the company’s ability to convert revenue into actual cash. Investors were told to expect revenue growth in low single digits for the fourth quarter of 2024. The company adjusted its EPS (Earnings Per Share) in a range of $1.07 to $1.11.

Why Paypal could be appealing? Look at its strategic initiatives

With its valuation lowered, PayPal could be appealing for value investors. Despite setbacks, this company remains a dominant player in online payments, which grew exponentially post-pandemic. It boasts over 400 million active accounts and a significant presence in e-commerce, which continues to expand globally. It consistently generates strong cash flow, allowing it to reinvest in the business, pay down debt, or return value to shareholders.

International expansion presents a major growth for PayPal, especially in high-growth, cash-reliant markets like Southeast Asia and Latin America. Digital payment adoption in these regions is increasing, creating new opportunities for the company to capture market share.

Strategic acquisitions, such as iZettle and Hyperwallet, have also strengthened its international presence by adding capabilities in payout services, further boosting their global payment ecosystem. PayPal’s acquisition of Paidy, a Japanese BNPL service, shows its footprint in the BNPL market. This Buy Now Pay Later (BNPL) service has become widely adopted by people and thereby adding a new revenue stream for PayPal with increasing engagement.

PayPal has embraced the surge of cryptocurrencies by introducing a U.S. dollar-backed stablecoin, PayPal USD (PYUSD). This allowed the users to buy, sell and hold vital crypto assets through this platform. This move is considered as a crucial way to perform digital transactions safely.

Among young consumers, the initiative of PayPal’s peer-to-peer (P2P) payment transfer service, Venmo (which was acquired in 2013) is experiencing a rapid growth. Venmo’s integration with Amazon for payments could further boost the user rate. As the digital economy grows, PayPal can continue leveraging Venmo to increase user engagement and drive revenue through fees on instant transfers and merchant payments.

Metrics and Valuation points to consider:

• Market Cap: At US$80bn, this is significantly lower than its peak valuation, creating a unique entry point for the investors. PayPal is expected to make a comeback in the upcoming financial years which can improve the company’s performance.
• Price-to-Earnings Ratio: This is notably below the tech sector average – at 11.5x for FY25 VS 33.9x for the broader Nasdaq. This makes the company an attractive pick for investors looking for growth at a discount.
• Dividend Potential: While PayPal doesn’t currently offer dividends, its consistent cash flow could open new opportunities for shareholder returns in the form of buybacks or adding a possibility for future dividends.

Risks to factor in

For investors looking to gain huge returns over a longer-term period , the current stock dip of PayPal might present a valuable opportunity. There are certain key concerns to address before investing in PayPal.

As the landscape of digital payments progress at a faster rate, companies like Block and Stripe are catching up to the competition and thereby creating more pressure of fintech companies to succeed in this sector. High inflation and rising interest rates have significantly impacted consumer spending which could indirectly affect the transaction rate of PayPal. Among the investors, there is a concern that growth will progress at a much slower rate considering these factors.

Final takeaway

It’s essential for investors to consider the market competition and economic factors that have dragged the stock down will persist for years to come or will improve. If the latter, the current share price decline would be an opportunity.

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