The story of PayPal (NASDAQ: PYPL) illustrates why there are no guarantees in the stock market. It practically invented the fintech sector, becoming the largest digital payments company with a huge brand presence and more members than the U.S. population.
However, after years of growth, PayPal has been struggling, and its stock is down 79% from its highs in 2021. Let’s see what’s happening at PayPal and where it could be a year from now.
Where PayPal went wrong
PayPal has several products and services that target individuals and business clients. It works with merchants to process payments and offers a large collection of business solutions. Meanwhile, its personal accounts that used to offer peer-to-peer payments now offer a full suite of financial services.
There are a number of reasons PayPal is losing investor confidence. It’s expanded into a supersized company, which can make it harder to steer. Cracks emerged, and other companies have filled the gaps and made them wider. PayPal has become vulnerable to this type of competition, and not sensing the shifting trends in its industry has made it appear outdated.
Profitability has also been sagging. It has pushed some of its lower-margin products to generate sales, like Braintree, which is a white-label service where clients use PayPal’s platform without the PayPal branding, and Venmo, an ever-popular personal app.
A new CEO’s vision
Faced with all these challenges, management brought in a new CEO, Alex Chriss, last September. He’s made some important changes to the company’s trajectory to boost profitability and create a clear and compelling growth story.
A few themes emerged from Chriss’ update on the first-quarter earnings call. One of them was the use of artificial intelligence and machine learning to leverage PayPal’s huge data trove and create more value for clients and expand its opportunities. No surprises there, but it’s a welcome shift.
Since PayPal reaches a mass market instead of a niche one, it’s priced its products attractively. But that’s been weighing on the bottom line. One term that came up a lot in the first-quarter earnings call is pricing to value, and management is righting its payment structure to price according to the value it provides. That should lead to higher profits and also improve its brand position, which Chriss admitted had lost some of its luster among certain markets.
The company is also focused on convincing its top merchants that PayPal’s value-added services are worth their prices. Part of PayPal’s value proposition is that, as the largest player with the broadest assortment of services, it can supercharge a merchant’s business with many tools and solutions. That can lead to higher conversions and sales for clients as well as other benefits. One example is its complete payments solution, which can drive value for smaller businesses that need complete packages. Chriss sees this as a differentiating factor and competitive edge for PayPal.
How the results of the new strategies could play out
Let’s be clear about a few things. PayPal has an incredible name and a huge base of members, and it operates in a high-growth industry. It has enviable assets and tons of potential. It’s nowhere near game over, and if management can successfully regroup and leverage its brand and assets, there’s every possibility that it can continue to grow and reward shareholders. So far, it’s going well.
In this year’s first quarter, revenue increased 9% year over year, beating expectations, and total payment volume was up 14%. Total active members decreased 1% year over year, but they increased sequentially after dropping sequentially every quarter in 2023. Transactions per active account continue to increase, reaching a high of 60 in the first quarter. Profitability was strong as well, with adjusted earnings per share (EPS) up from $0.85 last year to $1.08 this year.
In a year from now, what investors will want to see is steady sales growth, increasing profitability, and strong innovation. Beyond that, they will want to see PayPal reporting a growing membership base and higher growth from products other than Venmo and Braintree.
PayPal has the tools and management needs to make them work. If you have some risk tolerance, now is a good time to pick up some shares, which are trading at under 17 times trailing 12-month earnings — about their cheapest ever. But most investors should wait for sustained improvement.
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Jennifer Saibil 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: short June 2024 $67.50 calls on PayPal. The Motley Fool has a disclosure policy.
Where Will PayPal Stock Be in 1 Year? was originally published by The Motley Fool