Once a darling of the digital payments boom, PayPal(NASDAQ: PYPL) has fallen drastically over the past several years after slashing its lofty growth forecasts and changing its approach to growth. Investors went from treating PayPal as a fast-growing tech company to a dull value stock.
PayPal's valuation is appealing, but is it enough to earn a spot in your portfolio? Let's dig into its valuation and the company's plans to find out.
PayPal's transition from growth to a value stock
Three years ago, PayPal stock was flying high, and investors couldn't get enough. The payments company came off stellar growth amid the worst of the pandemic, which accelerated an already strong trend into digital payments. Over two years, it added 122 million accounts and surpassed $1 trillion in payments volume.
At one point, investors priced the stock at 109 times earnings, 18 times book value, and 17 times sales. But as the pandemic eased, it was clear that PayPal's staggering growth was unsustainable. The company shifted its strategy from rapid growth to being more engaged with its existing customers.
Investors weren't thrilled with this shift, and the stock has taken a beating ever since. Today, it's priced at 17 times earnings, 3.2 times book value, and 2.4 times sales, and has never been cheaper.
PYPL PE ratio data by YCharts; PE = price to earnings.
Reasons to sell PayPal
If stocks are cheap, they tend to be cheap for a reason. For PayPal, criticisms include its falling take rate, the decline in active accounts, and increasing competition from others in the digital payments space.
Braintree has been a bright spot for the company and is one of the fastest-growing parts of the business today. Last year, PayPal's total payment volume grew 7%, with Braintree being a key driver of that growth.
However, this unbranded checkout option is less profitable for the company, and its growing importance to PayPal's business is lowering its take rate (the percentage of each transaction it retains after splitting its fees with others), thus hurting its profit margins.
Also, PayPal is undergoing a transition year under new CEO Alex Chriss, an industry veteran who previously worked as an executive for Intuit's small-business and self-employed group and has been tasked with leading PayPal in a new direction.
If you don't want to wait around to see the outcome of PayPal's transition year and are uneasy with its slowing growth, you might want to sell the stock today.
Image source: Getty Images.
Reasons to buy or hold PayPal
In January, Chriss laid out his plan for the company. One part will be to improve its offerings for small and medium-size businesses with PayPal Complete Payments. Under Chriss' leadership in the small-business segment at Intuit, revenue grew by 23% compounded annually. If he can succeed at scaling up PayPal Complete Payments, the company could eventually expand its services and reverse the trend of its declining transaction margin.
PayPal also said it would work to improve its checkout process by enabling one-click checkouts, called Fastlane, which can reduce checkout times by 40%. According to BigCommerce, one of its customers that implemented Fastlane, conversion rates have been as high as 70%.
Not only that, but Chriss also discussed how the company planned to leverage AI to create personal recommendations and cash-back rewards to "turn one-time shoppers into repeat shoppers." If PayPal's transformation is successful, it has a highly appealing risk-reward profile at its current valuation.
Buy, sell, or hold PayPal stock?
Despite the negative sentiment around the stock, PayPal continues to grow at a nice clip. Last year, the company raked in $29.7 billion in revenue and $4.2 billion in net income. Its earnings per share (EPS) grew 84% from 2022 and increased 9% compared with 2021.
PayPal is undergoing a transition year, so investors should expect some bumps along the way. Its current valuation presents an attractive entry point for long-term shareholders today.
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Courtney Carlsen has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends PayPal. The Motley Fool recommends the following options: short June 2024 $67.50 calls on PayPal. The Motley Fool has a disclosure policy.
