There is a lot to like for a stock that’s declined 80% from its high.
Financial technology, or fintech, is about innovating and finding new ways to move money between people and businesses. PayPal (PYPL 3.22%) is the original fintech stock. It’s been around since 2000, and it survived the infamous dot-com bubble. It’s known today for its namesake digital and mobile payments network and Venmo, its peer-to-peer payments app.
Unfortunately, PayPal isn’t hot anymore. The business went stale, and the stock is down almost 80% from its high in 2021. PayPal’s new CEO, Alex Chriss, hopes to teach an old company some new tricks that will revive the brand and stock.
Can buying PayPal today set you up for life, or has this fintech stock seen its best days?
The answer may surprise you.
PayPal’s legacy business deserves more respect
It’s not flashy, but PayPal is still more prominent in the fintech space than you might guess. The company’s payments ecosystem spans approximately 434 million active accounts across 200 markets, and it processed $1.68 trillion in payment volume last year. Establishing a global payments network is remarkably difficult in the face of competition and regulatory hurdles.
Did PayPal’s business grow stale? I’d say so. Competition in its payment processing business has steadily eroded its margins. The company’s gross margins have slipped from approximately 64% a decade ago to under 46% early last year. Additionally, active accounts plateaued after 2021.
These are two nightmare developments! Yet, PayPal has continued to grow its top and bottom lines.
PYPL Revenue (TTM) data by YCharts.
Not many companies can stumble like this and grow earnings per share four-fold in 10 years. If the core business is this good, what will happen as Chriss executes his plan to build new products and features on top of it?
New tricks aimed at accelerating growth
At its recent investor event, PayPal emphasized its goal of becoming a commerce platform. It hopes to leverage its payment technology and user data to drive engagement for its users and merchants. In other words, PayPal wants its platform to encourage people to buy, sell, pay, and borrow more, which is a win-win for all.
This will all take time, but the company has a high ceiling if it executes well. PayPal’s network has already helped it compete in emerging vertical markets, like peer-to-peer payments, BNPL (Buy Now, Pay Later), and business loans and services. It launched a new digital advertising segment only months ago.
PayPal guided for 6% to 10% earnings growth in 2025, with goals to achieve low-teens growth by 2027 and at least 20% annualized earnings growth after that. It’s an aggressive goal, but again, PayPal’s earnings roughly quadrupled over the past decade despite collapsing margins and little unity among the company’s moving parts.
PayPal could be the hottest bargain on Wall Street
The best opportunities can make money without everything going as hoped, when there is far more reward than risk. I think that applies to PayPal here.
Make no bones about it: PayPal has become a value stock. Shares are trading at their lowest valuations on record, including a price-to-earnings (P/E) ratio of just 16 and a free cash flow yield of over 10%. I’m not sure there is another stock at such a low valuation with a shot at 20% annualized long-term earnings growth.
In addition, PayPal announced a new $15 billion repurchase program in the fourth quarter. Combined with the remainder of its existing program, this brings PayPal’s total upcoming repurchases to nearly $20 billion, roughly a third of its market cap. You could say management is putting its money where its mouth is and acting on the value it sees.
The massive repurchases will collapse the share count, boost per-share financials, and help establish a higher floor for the stock. Plus, PayPal can afford it. The company already has $10.8 billion in cash and expects $6 billion to $7 billion in cash flow this year. It’s a financial buttress if PayPal doesn’t organically achieve its growth goals.
Can buying the stock set you up for life?
As much as there is to like here, PayPal’s market cap is almost $60 billion. That’s probably too big for a small investment to grow into a fortune.
However, PayPal could reward patient investors with years of market-beating investment returns if it lives up to its potential. Yes, it can move the needle and help lift a diversified portfolio. Buying high-quality, growing businesses at dirt cheap valuations is a winning strategy that can, over time, set you up for life. PayPal is a strong candidate to fit that mold.
Justin Pope 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: long January 2027 $42.50 calls on PayPal and short June 2025 $77.50 calls on PayPal. The Motley Fool has a disclosure policy.