Author: Damjana Cvetkovska
Publication date: 30.07.2024
PayPal has been a dominant force in global digital payments for 20 years now. Recognized worldwide, PYPL stock is considered as one of the premier fintech investments for long-term growth. Since PayPal's noteworthy leap after the pandemic, its stock has become one of the worst-performing large-cap tech stocks in recent years. Hence, this raises the question: Is PayPal worth investing?
How does PayPal operate?
Paypal users can receive, send, or request money from everyone with an account on this application. To carry out these transactions, one needs a PayPal username of the recipient, email address or phone number. Each account has a unique PayPal.me link and QR code used for money transfers. In addition, users can utilize this digital platform in-store by loading their digital wallet and selecting PayPal at checkout. PayPal is available for both individuals and businesses.
PayPal’s biggest problem
The platform remains a dominant force in the digital landscape, yet faces a takeover from tech giants such as Google and Apple. At once, fintech companies such as Stripe, Block and Adyen are also taking advantage of various market segments, challenging PayPal’s stronghold.
In Q4 of 2022, PayPal reached its maximum with 435 million active users. However, this number faced a sequential decline in 2023, only to bounce back in the first quarter of 2024. The digital platform has focused on increasing the revenue from its existing customers, especially through increased transaction volume on Braintree and Venmo.
The expanding reliance on Venmo and Braintree, as well as the inability to gain more users, led to the decline of the transaction rate from 2.89% to 1.76% in 2023. This metric declined even further to 1.74% in the first quarter of 2024.
Turnaround strategy
The CEO Alex Chriss expects 2024 to be a crucial transition period for PayPal. During this year, the company plans to augment the ecosystem by introducing new attributes such as Smart Receipts, FastLane checkout and Cash Pass rewards. In addition, it intends to provide efficiency in cross-border transfers by increasing the adoption of PayPal USD stablecoin.
PayPal aims to maintain its disciplined spending practices. The company reported an 84-point increase year-over-year in its operating margin. Going forward, PayPal seeks to achieve $5 billion in free cash flow for the entire year, exceeding the 4.2 billion achieved in 2023.
While PayPal holds back from making specific revenue projections for the year, analysts foresee a 7% rise in revenue. This growth rate marks a declaration from the 8% increases noted in both 2022 and 2023.
PayPal stock still appears undervalued at forward earnings multiple of 15. Nevertheless, continuous investor confidence at this leveled assessment may depend on the emergence of additional positive indicators in the company's work.
Is it the right time to invest in PayPal?
As of March 2024, PayPal's income statement shows:
Revenues: $7,699 million, revealing strong market presence and customer base.
Gross Profit: $7,699 million, equal to total revenue, with no separately reported cost of goods sold (COGS).
Operating Income: $1,168 million, demonstrating operating efficiency notwithstanding substantial operating expenses.
Net Income: $2,097 million, emphasizing profitability after all expenses, along with interest and taxes. This points to PayPal's effective cost management and strong financial performance.
Conclusion
PayPal's financials show strong revenue and profitability, reflecting efficient management and cost control. The significantly higher net income compared to operating income suggests the presence of considerable non-operating income or tax benefits.
Given its financial health, PayPal emerges as a promising investment for the Q3 of 2024. This assumption is supported by its strong revenue, efficient cost management and high profitability. These factors assert the company's effective management and potential for continued financial success.
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