It’s fair to say that PayPal (NASDAQ: PYPL) has underperformed. Year to date, the growth stock is down about 20%. As a result of this slide, it’s now about 80% below its highs.
Is there potential for a rebound in 2024? Let’s take a look.
Why the share price has tanked
This year, there have been several factors that have hurt PayPal’s share price.
One is concerns over competition from Apple Pay. Many investors are worried this could make PayPal’s services obsolete.
Another is the company’s profit margins. In its Q2 results, the company reported a non-GAAP operating margin of 21.4%, below its previous estimate of 22%.
Then, in its Q3 results, it reported an operating margin of 22.2% versus 22.4% a year earlier. It also cut its annual forecast of adjusted operating margin expansion to 0.75% from 1%.
Now, I think the competition from Apple Pay is a legitimate risk here. These days, it’s so easy to pay for things with this service from the iPhone maker. So this definitely adds some uncertainty to the investment case.
However, I’d argue that this risk is baked into PayPal’s share price and valuation. For 2024, analysts expect the business to generate earnings per share of $5.55 (versus a forecast of $4.95 for 2023).
So at the current share price, the company has a forward-looking price-to-earnings (P/E) ratio of about 10. That’s low.
It’s worth pointing out that PayPal is still growing at a healthy rate today. For Q3, the company reported total payment volume (TPV) of $387.7bn, up 13% on a constant currency basis and net revenues of $7.4bn, up 9% currency neutral.
And for 2023, it expects earnings growth of around 20%.
It’s also worth pointing out that Paypal doesn’t only operate in the retail payments space. It also operates in the business payments space through its Braintree division, which processes transactions for the likes of Uber (it recently signed a multi-year global deal here), Airbnb, and Stubhub.
Research firm MoffettNathanson estimates that Braintree revenue climbed to $8.4bn last year (about 30% of total revenues) from $6.2bn in 2021. So Apple Pay is unlikely to completely wipe out the business.
In light of this growth, and the diversified business model, a P/E ratio of 10 seems too low, to my mind.
PayPal still has believers
One portfolio manager who is still bullish on PayPal is Nick Train, who owns the stock in his global equity fund.
In a recent fund factsheet, he wrote: “While the short-term concerns are understandable, we continue to believe that payments is a big enough market for multiple competitors, and PayPal is one of the few players that has the critical mass of active customers and merchants, which is so hard for challengers to replicate.”
Plenty of brokers are optimistic too. For example, Canaccord Genuity, which has a ‘buy’ rating on the stock and a price target of $100, believes innovation could help the company regain and sustain double-digit growth.
Putting all this together, I think PayPal stock is worth a closer look right now. I think there’s potential for a rebound in 2024.