The narrative around PayPal (PYPL 0.94%) stock has been bearish for a couple of years now. The stock price is off close to 80% from all-time highs set in mid-2021 and was trading under $50 a share at one point back in 2023. Today, the stock trades at around $62. Despite big competition from native e-commerce checkout, Apple and Alphabet's Google Pay, peer-to-peer services, and software providers such as Stripe, PayPal has continued to grow its sales and profits at a steady clip each quarter.
On July 30, PayPal once again reported strong quarterly growth despite this competition narrative, with revenue growing 8% year over year. And yet, the stock still sits at just $62 compared to over $250 a share a few years back. Does that make PayPal stock ridiculously cheap?
Time to take a closer look at this financial technology giant and see whether it belongs in your portfolio today.
Growing payment volume across the board
PayPal's top line looked strong in the second quarter. Payment volume -- the amount of dollars flowing through PayPal's various systems -- grew 11% year over year to $417 billion. Since PayPal takes a cut of every dollar that it processes, rising payment volume leads to growing revenue. This happened in the second quarter, with revenue growing 8% year over year to $7.9 billion. Profits looked strong, too, with operating income of $1.3 billion in the quarter, up 17% year over year.
The company's revenue has grown consistently over the last five years. So why is the stock down? Well, it is likely because of declining active accounts. At the end of 2022, PayPal had 435 million active accounts that it hoped to grow in the next few years. Today, the active accounts total stands at 429 million. While PayPal definitely had a hangover from the COVID-19 pandemic and its e-commerce boom, new management has focused less on the total number of active accounts and instead wants profitable accounts using its services.
You can see this in a few numbers. First, customers that are active each month grew 3% year over year last quarter to 222 million. Second, transactions per active account are growing 11% year over year. Even though some investors care about the headline active accounts figure, the underlying mix of active accounts is much better than a few years back and shows why PayPal continues to grow its payment volume.
NASDAQ: PYPL
Key Data Points
Better profitability, increasing capital returns
In 2021, PayPal reached an annual profit margin of around 18%. After growth slowed coming out of the pandemic, margins fell to well below 15%. This was a multiquarter process and a worrying trend on Wall Street. Declining margins led to lower earnings per share (EPS), which fell from around $4 to $2 over this period. However, in recent quarters PayPal's margins have crept back up and are approaching all-time highs again. I believe this shows the business is in a healthier spot than investors are giving it credit for right now.
With healthy profits and cash flow, PayPal has decided to return cash to shareholders through share repurchases. It expects to spend $6 billion on buybacks this year and has reduced its shares outstanding by 13% since the end of 2022. At a market cap of $64 billion, PayPal is expected to repurchase around 10% of its shares outstanding in 2024, which will help grow EPS and create value for long-term shareholders.
PYPL Operating Margin (TTM) data by YCharts
The math says PayPal is cheap -- but is it?
For the full-year 2024, PayPal management expects the company to generate an EPS of around $3.90. Based on its stock price of $62, investors can buy the company at a forward price-to-earnings ratio (P/E) of about 16. For a company that grows revenue at a consistently high rate and is buying back stock, I think EPS can grow at 10%-plus over the next five years. Compared to a forward P/E of 16, this does look ridiculously cheap. Investors will probably do well buying PayPal stock right now.
However, this does not mean you should pile your entire portfolio into PayPal stock. It is climbing the proverbial wall of worry, but it still faces stiff competition. Platforms such as Apple Pay are gaining market share that could be going to PayPal, which could finally start to hurt payment volume flows over the next few years. There are risks with any stock, meaning that if you like PayPal stock it can be a part of a diversified portfolio as you save for retirement. Just don't make it your entire portfolio.
