2024 has been a terrific year for US growth stocks. And it’s what’s helped propel my Stocks and Shares ISA up by over 32% so far this year. Looking just at the S&P 500, the US’s flagship index has risen by 26% since the start of the year. And it’s a similar story with the Nasdaq 100.
There’s no denying that some valuations are definitely getting a bit frothy. Yet others still look reasonably cheap, in my opinion. And one stock that I’ve recently bought is PayPal (NASDAQ:PYPL).
A global payments giant
The performance of PayPal shares has been far less than ideal over the last five years. While the valuation initially rocketed in 2020 and the first half of 2021, the digital payments business quickly collapsed as the stock market correction sank in. Even today, the shares are still trading around 70% below their 2021 peak.
Being a shareholder since 2017, I’ve been holding on through the storm, waiting for a turnaround. And I think it might have finally started. At least, that’s what the latest results would suggest. And given the stock price is also up over 40% in the last six months, it appears other investors are starting to agree.
The bull case
PayPal continues to innovate within the digital payments space. It recently launched a new speedy checkout solution called Fastlane. This enables online shoppers to buy without having to fill out passwords while keeping transactions secure. And new strategic partnerships with Amazon and Shopify have once again opened the door to even more transaction volume flowing through its network.
Meanwhile, over on the financials side of the equation, earnings growth is back in double-digit territory thanks to expanding profit margins. Free cash flow generation remains strong, continuing PayPal’s ability to almost print money. And management is using this excess cash to buy back billions of dollars worth of its own shares, indicating it also believes the stock price is looking cheap.
What could go wrong?
Investing in a turnaround isn’t risk-free. And PayPal still has some challenges to overcome. The impact of the recent economic downturn has been clear. And while conditions are now finally improving, this won’t be the last time the business will have to navigate through adverse operating conditions.
In the meantime, while earnings moved encouragingly, the same can’t be said for revenue. With already close to 40% global market share in the digital payment management space, delivering top-line growth is proving challenging, with third-quarter sales falling below expectations.
New CEO Alex Chriss is currently focused on delivering operational efficiency. And given the comeback in earnings, seems to be working well. But margins can only be improved by so much. So, if PayPal wants to maintain its momentum in the long run, on transaction volumes it needs to find new avenues for growth. The newly announced strategic partnerships are definitely a step in the right direction. But time will tell whether these will deliver on expectations.
Nevertheless, at a forward price-to-earnings ratio of just 18.2 versus its historical average of 45, PayPal shares simply look too cheap in my eyes. That’s why I’ve just added more to my Stocks and Shares ISA.
