You’ll Never Believe Which Outdated Financial Stocks Are Outpacing the S&P 500 in 2024

Looking back more than 50 years, S&P 500 it grows by about 10% every year. But don’t tell the market that in 2024. As of Sept. 27, the S&P 500 is up more than 20%, making it an above-average year to date with three months to go.

Beating the S&P 500 over the long term is difficult enough, and beating the market in a good year can be even more difficult. But if you bought financial technology (fintech) company shares. PayPal Holdings (PYPL -1.54%) on January 1st, then you would outperform the market average.

PYPL data by YCharts

The super performance is noteworthy. PayPal underperformed the S&P 500 in 2021, 2022 and 2023. And it even underperformed again in 2024 until recently. But the stock has suddenly come back to life, and for good reason, as I’ll explain.

Why PayPal Stock Is Rising Suddenly

In 2023, PayPal began a season of change by hiring new CEO Alex Chriss. His predecessor, Dan Schulman, had long planned to retire. And that essentially caused the company to hit the pause button — it didn’t want to make long-term plans until it had its long-term leader.

Chriss’ tenure did not necessarily get off to a smooth start. In January, he said PayPal would “shock the world” when it unveiled new features. But investors felt his updates were noisy at the time. In short, it looked like Chriss over promised and under delivered.

However, PayPal stock is surging as it appears its revival is finally getting some traction.

For starters, PayPal has secured some impressive partnerships in recent months. Most recently, a deal was struck with Amazon. The Amazon Prime subscription service offers certain benefits to consumers, and the company allows merchants to extend these benefits to consumers on their own websites through its Buy With Prime integration.

Starting next year, consumers can enjoy this inside the PayPal app as well. The company’s merchants will be able to link their Shop with Prime accounts. It’s just another way PayPal is trying to position itself to be used by as many consumers as possible, as well as join forces with major companies.

When it comes to many of its partnerships, PayPal often processes payments behind the scenes — you may have been using it without even knowing it. While this helps PayPal in terms of volume and revenue, these unbranded services are increasingly low-margin. As a result, the company’s revenue has grown nicely in recent years, while its gross profit has declined.

PYPL Revenue (TTM) data by YCharts

Under Chriss leadership, this problem could now be solved. In the second quarter of 2024, PayPal grew its dollar transaction margin — a fintech measure similar to gross profit — by 8% year-over-year, which was the best increase in this measure since 2021. Of course, it continued to increase revenues, but I hope it is a first step in the right direction.

Finally, there are some things to expect with PayPal as well, such as advertising. When it comes to the company’s recent focus on building an advertising business, many investors probably have the wrong idea. For those who think they’ll have to watch an ad to make a payment, that’s not really what’s happening.

In reality, PayPal has millions of merchants using its services. The Company may provide these merchants with consumer data so that they can better target new customers, as well as incentivize purchases with special prices. It helps merchants improve sales conversions, which will hopefully grow their business overall.

What this all means for investors today

There are real positive developments underway with PayPal’s business. That is why the stock rises sharply. But could it grow even higher? Here’s something to remember: Even with its recent struggles, PayPal has been a big, profitable business. But its valuation had fallen to an all-time low from a price-to-free-cash-flow perspective.

PYPL Price to Free Cash Flow Data by YCharts

Even after bottoming out, PayPal stock is still cheap at less than 13 times free cash flow. And when a stock is trading cheap, investors give the business very little credit. Without saying so, investors say they don’t think PayPal will grow its free cash flow or put it to good use over the long term.

In this case, it’s starting to look like investors might be wrong. PayPal’s key metrics are improving, and the business has potential long-term growth drivers. In addition, it uses its free cash flow to buy back shares, which increases shareholder value.

In other words, PayPal stock could indeed have more upside if the rally continues in the right direction.