With the increased adoption of digital payments and demand for cryptocurrency, fintech companies' future appears bright. Amid a sea of rising fintech players, PayPal Holdings' (PYPL) recovery is spectacular.
PayPal has experienced both highs and lows in recent years, driven by shifting market dynamics, competitive pressures, and changing consumer behaviors. However, under the leadership of new CEO James Alexander Chriss, the company’s growth story has started to take a new turn. Its recent third-quarter results showed significant progress, reigniting growth. PayPal stock has surged 41% year-to-date, outperforming the S&P 500 Index's ($SPX) gain of 26.4%. Nonetheless, Wall Street expects more than 45% upside next year.
Furthermore, the company’s valuation appears relatively low compared to its historical highs. This presents a buying opportunity for value-oriented investors seeking long-term growth potential in the fintech industry. Let’s find out more.
About PayPal Stock
PayPal, with a market capitalization of $83.2 billion, is a globally recognized and trusted brand, giving it a strong position in the digital payments world. PayPal has diversified its revenue streams by offering Venmo, Xoom, Honey, and Buy Now Pay Later (BNPL) services, as well as cryptocurrency trading to both consumers and enterprises, reducing its reliance on a single service.
PayPal’s Progress Is Noteworthy
PayPal has been on a recovery path since August 2023, when a new member assumed leadership of the C-suite team. According to CNBC, Chriss, the new CEO, stated confidently that he was prepared to "shock the world."
Many analysts believed that PayPal's new growth strategies under the new CEO would turn the company's fortunes around and restore consistent profitability. Following its second-quarter results, Argus Research upgraded PYPL stock, describing the company's progress as "faster than originally expected." And this is what we saw in the third-quarter results.
PayPal's user base expanded significantly in the third quarter, with active accounts increasing by 0.9% to 432 million globally. This resulted in a 9% increase in total payment volume to $422.6 million.
Net revenue increased 6% year on year to $7.8 billion, but fell short of expectations by $43.1 million. Adjusted earnings rose 22% to $1.20 per share, beating analysts' expectations by $0.13.
PayPal had $16.2 billion in cash, cash equivalents, and investments at the end of the period, plus $12.4 billion in debt. The company also reported an adjusted free cash flow balance of $1.5 billion, and repurchased $1.8 billion in shares during the quarter. Continued earnings growth and a strong free cash flow balance should help the company reduce its debt burden.
PayPal's focus on expanding its service offerings bodes well for the future. During the quarter, the company expanded its partnership with Shopify (SHOP) to provide value to their mutual customers. The company also collaborated with Amazon (AMZN) "to bring PayPal Checkout to SMBs, offering Buy with Prime." PayPal intends to allow Prime members to link their Amazon and PayPal accounts to gain additional benefits.
Its cryptocurrency platform enables users to purchase, store, and sell digital currencies using their PayPal and Venmo accounts. It recently introduced a feature that enables U.S. merchants to handle cryptocurrency directly from their PayPal business accounts. This initiative aligns with the growing interest in crypto, and can drive further user engagement.
PayPal sees emerging markets as a significant opportunity, especially as global digital payment adoption accelerates. Collaborations with other fintech companies, such as Adyen (ADYEY) and Fiserv (FI), could bolster PayPal’s growth potential in the coming years. Besides China and Hong Kong, it plans to launch PayPal Complete Payments in more markets in 2025.
Due to increased spend on marketing efforts during the holiday season, management expects adjusted EPS to dip by a low to mid-single-digit percentage in the fourth quarter, but revenue to grow by a low single-digit percentage. However, full-year adjusted EPS growth could be in the high teens. In addition, the company plans to generate $6 billion in free cash flow and repurchase $6 billion in shares this year.
Is PayPal Stock a Buy Now On Wall Street?
Following the Q3 results, Susquehanna analyst James Friedman increased the target price for PYPL stock to $94 from $83. Friedman is pleased with the "consistency of new management to deliver transaction margin dollar growth of 8%" during the quarter. Similarly, analysts at JP Morgan, UBS, and Baird all raised their respective target prices for PYPL.
Overall, Wall Street is moderately bullish about PayPal stock. Out of 43 analysts in coverage, 16 rate it a “strong buy,” two recommend a “moderate buy,” 24 rate it a “hold,” and one recommends a “strong sell.”
Based on its mean target price of $86.89, the stock has an upside potential of 1.2%. However, its high price estimate of $125 implies the stock could rally by 45.6% over the next 12 months.
While full-year earnings might decline in 2024, analysts predict that PayPal’s earnings will increase by 7.4% in 2025. Trading at 16.9x forward 2025 projected earnings, PYPL stock seems reasonably valued compared to its five-year historical average P/E ratio of 54.6.
The Bottom Line on PYPL Stock
PayPal's management, under the new CEO, is focused on boosting profitability. Its initiatives to expand its financial services and focus on B2B offerings may drive future growth. While the ongoing progress is noteworthy, there may be short-term volatility. Long-term investors who can weather the short-term headwinds may find PayPal's current price an appealing entry point.
More Stock Market News from Barchart
