PayPal Stocks: Buy, Sell or Hold?

PayPalhis (PYPL 2.46%) the stock has fallen about 80% over the past three years. The digital payments leader lost its luster as pandemic-fueled growth ended and faced tougher macro and competitive headwinds. Dan Schulman, who has led the company since its spin-off from eBay in 2015, he also retired last September and was succeeded by intuit Executive Vice President Alex Chriss.

Under Chriss, PayPal expanded its ecosystem with new services while carefully controlling expenses. That’s a tough balancing act to pull off, and the bulls don’t seem too eager to rush. However, PayPal’s second-quarter report on July 30 beat analysts’ expectations on the top and bottom lines and suggested its business is gradually stabilizing. Let’s dig into these numbers and analyze the top reasons to buy, sell, or own this underdog fintech stock.

Image source: PayPal.

Key numbers

PayPal faces three long-term challenges. First, eBay replaced PayPal with its Dutch rival, Adyenas the payment platform of choice in a five-year transition from 2018 to 2023. Second, PayPal faces stiff competition from big tech companies, other digital payment providers, and Buy Now Pay platforms later (BNPL). Finally, higher interest rates and other macro headwinds generally slow consumer discretionary spending.

PayPal’s active accounts peaked at 435 million in the fourth quarter of 2022, but fell sequentially during 2023. But over the past two quarters, the number of active accounts has risen sequentially again as revenue growth has stabilized .

Data source: PayPal. YOY = Year Over Year.

Most of that recovery was driven by PayPal’s consumer app and its peer-to-peer payments platform Venmo. For the third quarter, PayPal expects its revenue to grow by single-digit percentages as adjusted earnings per share (EPS) increases by single digits.

For the full year, PayPal expects EPS to increase in the low to mid-teens on an adjusted basis and 1% to 4% on a generally accepted accounting principles (GAAP) basis. He did not provide top-line forecasts, but analysts on average anticipate a 7% increase.

Reasons to buy or own PayPal

PayPal’s steady growth in accounts suggests its new features — including its streamlined FastLane payment service, its Smart Receipts tool and its Cash Pass rewards program — are attracting more users. To keep pace with its more nimble competitors, it expanded its own BNPL platform and facilitated more cross-border transfers with its own PayPal USD stablecoin.

Adjusted operating margin rose 231 basis points year over year and 30 basis points sequentially to 18.5% in the second quarter as it cut expenses. As a result, its adjusted free cash flow (FCF) — what’s left over from cash flow after capital investments — rose 31% to $1.14 billion. The company plans to earmark a lot of that cash for bigger buybacks. It has already bought back $5 billion in shares over the past 12 months.

PayPal still had $18.3 billion in cash, cash equivalents and investments on its balance sheet at the end of the second quarter. This gives it a lot of room to expand with more investments and acquisitions.

And at about $64 per share, PayPal stock is trading at less than 16 times the midpoint of its full-year GAAP EPS forecasts. This low valuation should limit its downside potential as it stabilizes its business.

Reasons to sell PayPal

PayPal’s headline numbers are improving, but its transaction take rate (the cut of each transaction it takes as revenue after splitting fees with credit card processors and other payment networks) is still falling.

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

To offset this pressure, PayPal will need to continue to cut expenses and buy back shares to increase EPS. In other words, his business is still maturing and has no room for growth. It might be a decent value stock at these levels, but it might not be a compelling play compared to higher-growth fintech companies.

Is it time to buy, sell or keep PayPal?

PayPal’s business isn’t going off a cliff, but I wouldn’t buy stock until the take rate stabilizes. If you already own PayPal, I don’t think you should sell it at these historically low valuations. So for now, your best move would be to simply hold PayPal and focus on higher-growth fintech plays or cheaper value stocks in this volatile market.