Why Is PayPal Stock So Low?

PayPal (NYSE:PYPL) CEO, Alex Chriss, stated that the company would shock the world in early Q1 2024 when interviewed on a major financial news network. It’s fair to say shareholders were hopeful of some disruptive innovation that would capture the imagination of investors but instead, a few weeks later, he announced a massive layoff of 9% of the workforce

The positive aspect of the layoff was a notable cost savings but the reality that cutting expenses was the big “shock” disappointed investors who subsequently sold the stock. 

With the share price muted for so long, is there any hope for a resurgence? And why has the stock been in the doldrums for such a long time?

Why PayPal Should Be Higher

Shareholders have long been banging the drum that PayPal shares should be higher. After all, the company’s market share is twice that of its nearest competitor, Stripe, which holds a 20% stake of the online payments processors pie. Third on the list is Shopify Pay Installments with 13% share and left in the dust is Amazon Pay with closer to 5%.

Another tailwind to the bullish investment thesis is revenue growth, which has risen year-over-year for the past decade without interruption. The growth rates from 2017-2021 were 20.8%, 18.0%, 15.0%, 20.7% and 18.3% but notably in the past two years growth has slowed to 8.5% and 7.5% YoY, respectively.

Supporters will also point to the 400 million active accounts on the platform as a reason to stay optimistic about the firm’s future prospects while bears will highlight that, over the last few quarters, the total number has been declining.

Another selling point is PayPal has a brand advantage over many competitors. It’s believed that as high as 80% of online retailers accept PayPal but with such expansive market share so too has growth slowed. There are simply fewer opportunities to capture versus those available to rivals. 

The key thing to note is that while total payment volume has been growing the year-over-year change has been slowing and the domino effect has impacted the share price. So is it time to sell PayPal?

PayPal Bearish Thesis

The all-important take rate is a primary factor bears can point to in order to claim PayPal is in trouble. Even if total payment volume rises, if the percentage PayPal captures of that, known as the Take Rate, declines, the result can be stagnant or slower growing revenues.

Another troubling statistic is the $21 billion that the Board of Directors approved to be allocated to share repurchases. With the share price tumbling so far, it seems that the money could have been much better spent on R&D to innovate or even to follow the acquisitive path it had been on to buy rivals.

It also shows that, absent opportunities to snap up rivals or innovate from within, share repurchases are a signal that management believes the best use of cash flow is simply to return it to shareholders. So far about 10% of the total number of shares outstanding have been bought back.

What does this all mean for shareholders now?

Why Is PayPal Stock So Low?

PayPal stock is low because revenue growth has slowed and the take rate has declined creating margin pressures.

The low share price has, however, caused many to wonder whether the upside is large now. 37 analysts cover the stock and have a consensus price target of $75.91 per share on it.

In a similar vein, a 5 year discounted cash flow forecast analysis places fair value substantially higher at $104 per share.

Further cementing the bullish valuation thesis is the 17.9x price-to-earnings ratio, by no means a premium figure.

With a $67 billion market capitalization and $29 billion of revenues being generated, there is lots to like about PayPal. In fact, many of the key multiples would suggest PayPal is a screaming Buy, from the 18.8% return on equity to the 12.3% return on invested capital.

Even net income growth looks excellent with forward 5-year projections coming in at a 27.7% CAGR. Yet the stock continues to stagnate, why?

Will PayPal Stock Rebound?

What the bulls may be missing is that PayPal is in the midst of a major transition from growth to value stock. In the process, multiples compress and so what seems like a cheap growth stock can be misinterpreted for an expensive value stock.

If PayPal is indeed a company that is likely to produce massive cash flows but grow at a much slower rate in the future then the share buyback scheme, which seems at first glance to be smart, may in fact be throwing good money after bad.

It’s perhaps not the bargain that management and shareholders believe it is.

The Bottom Line For PayPal

This seems to be a good time to remember the old Buffett line about stocks not being pieces of paper but representative of real companies.

Are the fundamentals justifying higher prices right now? A cash flows analysis would suggest the upside is material but we must respect the share price now that has been consistently signaling to investors that this is a stock in transition from growth to value, and its best days may be in the past.

If we look to the ever slower top line growth while the net income is still forecast to rise at double-digit percentage rates the signs are evident that a metamorphosis is taking place and multiples are likely to slim down. 

In short, a pure valuation analysis should not necessarily be the prime determinant of whether to buy PayPal stock now. As Stan Druckenmiller has expressed, a good company and a good chart are needed to compel a buy and, in this case, PayPal has a terrible chart in spite of solid fundamentals. That alone should raise red flags that the bounce so many are expecting may not materialize as soon as they hope.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.