Can PayPal Stock (PYPL) Escape its 4-Year Slump?
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But with strong free cash flow and shares trading at deep value levels, there are fresh hopes for a rebound. Given the confluence of factors and potential catalysts on the horizon, I am opportunistically Bullish on PYPL stock.
Why PayPal Stock is Flatlining
The digital payments world is fiercely competitive, and PayPal faces thousands of payment providers that can compete on service and scale. Giants like Apple Pay (AAPL), Shopify (SHOP), and Buy Now, Pay Later (BNPL) players are eating into its market share. Last year, PayPal's revenue grew just 6.8% to $31.8 billion, a slowdown from its earlier high-growth days.
Growth stalled further, reaching roughly 2% in Q1, with its transaction take rate dipping to 1.68%, a 6-basis-point decrease, due to a shift toward lower-margin merchants and products. Management's decision to shed unprofitable Braintree volume, anticipating a 5-point revenue headwind in 2025, has also not helped top-line growth. As TipRanks data shows, PYPL's transaction rate has been climbing alongside a stagnant share price since 2021.
In addition, PayPal's strategic missteps haven't helped it either. The $4 billion Honey acquisition in 2020 hasn't delivered the e-commerce boost hoped for, with integration falling flat. Then you have geopolitical risks, such as potential U.S. tariffs that would impact less than 2% of branded checkout volume from Chinese merchants, adding uncertainty.
However, the most significant long-term headwind will continue to be competition, which remains fierce. Apple's ecosystem and Visa's (V) network effects create barriers, but a company like PayPal struggles to establish a similar type of moat.
Signs of Life in a Tough Market
On a brighter note, PayPal does boast some wins. In Q1, total payment volume rose 4% on a currency-neutral basis to $417 billion, driven by branded checkout, Venmo, and Braintree. Transaction margin dollars, a key profitability metric, increased 8% to $3.7 billion, celebrating five consecutive quarters of profitable growth. CEO Alex Chriss, on the earnings call, highlighted Venmo's traction, with a 20% surge in revenue and 30% growth in monthly active accounts for debit card and Pay with Venmo features, calling it 'a key engagement driver.'
PayPal has also placed some compelling innovation bets. Its Fastlane checkout solution boasts an 80% conversion rate for returning users, streamlining transactions. Partnerships with NBCUniversal, Roku, and StockX are expanding its reach, and 45% of U.S.-branded checkouts now run on an upgraded platform, with Europe targeted for 2025.
The Buy Now, Pay Later (BNPL) segment also shone last quarter, with payment volume up over 20% and active accounts up 18%, tapping into a rising market expected in the U.S. Mr. Chriss emphasized the use of AI-driven personalization, stating that they are utilizing AI to enhance support and create dynamic checkout experiences. I think these moves show PayPal is trying to adapt, even if revenue growth lags.
A Cash Cow with Deep Value Potential
For the time being, PayPal's biggest strength is its cash flow, making it a compelling value play. Last quarter, PayPal generated $1.89 billion in free cash flow, on track for its $6-7 billion full-year target.
In the meantime, the company's aggressive share repurchase plan, with $6 billion planned for 2025, or 9% of its market capitalization, demonstrates management's confidence in its undervaluation. The 'buyback yield' is also quite hefty on its own, even if PayPal sees little to no growth from here.
Note that since 2022, PayPal's shares outstanding have declined by 17%, which has boosted earnings per share despite revenue challenges. With buyback levels rising against a lagging share price, repurchases are expected to be more accretive over time. In fact, consensus EPS estimates indicate growth of over 10% in 2026 and 2027.
Given that analysts tend to be conservative with this stock, earnings growth could significantly surprise the bears over the medium term. Therefore, I believe that at just under 15 times this year's expected EPS, PayPal appears to be priced like a bargain. Even without a strong moat, PayPal's cash generation and buybacks could drive returns.
Is PYPL a Buy, Sell, or Hold?
Currently, analysts appear divided between bullish and neutral views on PYPL stock, suggesting that some see it as a value play, while others remain skeptical. The stock has a Moderate Buy consensus rating, based on 12 Buy, 14 Hold, and three Sell ratings assigned over the past three months. Today, PYPL's average stock price target of $80 implies roughly 6% upside potential over the next twelve months.
A Turnaround Worth Watching
PayPal has been weighed down by fierce competition, a lackluster acquisition of Honey, and lagging growth, earning its 'dead money' label. Yet, its most recent quarter showed resilience, with $417 billion in payment volume, decent transaction margin growth, and Venmo's breakout performance.
Then, its robust free cash flow and $6 billion in planned buybacks come together to make it a deep value play. If PayPal scales innovations like Fastlane and BNPL while navigating headwinds, it could shake off its slump and reward those betting on its comeback.
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