Fintech specialist PayPal (PYPL -3.23%) was a disappointing investment in 2023. The company’s stock prices have fallen 19% so far this year amid concerns about slowing growth, a major leadership change and other issues. It might be tempting for some PayPal investors to cut their losses and dump their shares at this point, but that could be a mistake.
Despite its recent difficulties, there are reasons to believe PayPal can reverse course next year. More importantly, it remains a great stock for long-term investors. Let’s consider why.
PayPal’s two-sided network
PayPal’s growth slowed as the worst of the pandemic eased and demand for its services waned. Compared to the incredible highs in the early days of the outbreak – which included some of the company’s best quarters ever – the company isn’t doing particularly well right now. However, it is not clear whether the fintech leader is doing worse overall due to the disruption caused by the coronavirus outbreak.
As PayPal management reported earlier this year, some of the company’s key metrics posted excellent compound annual growth rates (CAGR) between 2017 and 2022. To give just one example, PayPal’s revenue experienced a CAGR of 16% during this period. PayPal’s revenue growth fell below that average this year, but is still growing. In the third quarter, the company’s revenue rose 8% year over year to $7.4 billion.
PayPal’s results depend in part on people’s spending habits and patterns. The company’s consumer-focused business includes a variety of services, from peer-to-peer payment app Venmo to quick online checkout on the websites of thousands of retailers. PayPal also offers several services to businesses, including a payment gateway platform through its Braintree subsidiary.
PayPal’s revenue growth is expected to improve along with the economy, higher business activity and higher consumer spending. Even though parts of the economy didn’t do so well this year, it wasn’t that bad, especially considering that a recession was expected at the start of 2023. In the third quarter, US gross domestic product grew by about 5% – growth not seen since the fourth quarter of 2021.
That doesn’t mean the economy won’t crash in 2024, but it’s at least a good sign of progress.
A strong economic moat
Another advantage of PayPal is the company’s strong competitive advantage. First, it has developed a solid brand name that customers and businesses trust. This is important in every industry, but especially in the financial sector. When companies offer PayPal as a payment option, customers tend to view the company as trustworthy. This provides security for everyone involved in the transaction.
Second, PayPal benefits from a strong network effect. The more private individuals use PayPal as a digital wallet, the more attractive the ecosystem becomes for companies. This ensures that the company will continue to accept individuals and companies into its network in the long term, especially since it offers a comprehensive package of services. PayPal has recently expanded into BNPL (buy now, pay later) services, among others.
At the end of 2022, PayPal’s adoption rate among the 2,500 largest retailers in North America and Europe was 79%, up from 76% the previous year. No company came close: the runner-up had an acceptance rate of 28%. Additionally, PayPal’s year-over-year growth rate in the adoption category was three percentage points higher than other well-known digital wallets – an impressive achievement given its already high adoption rate.
PayPal’s economic edge will continue to be important as digital wallets become more popular and the fintech industry continues to expand.
The valuation looks attractive
PayPal’s stock sell-off over the last 18 months has left the stock looking reasonably valued.
For comparison, the average price-to-earnings ratio in the financial industry is 13.8, while PayPal’s price-to-sales ratio of around 2 or less is generally considered undervalued. Given PayPal’s valuation, the fact that the company isn’t doing as badly as it seems, its economic edge, and the prospects of the larger fintech industry, the stock is a solid buy through 2024, at least in my opinion.
This is especially true for investors who want to hold the stock for five years or longer. Ultimately, patience is rewarded at this top company.
Prosper Junior Bakiny holds positions at PayPal. The Motley Fool has positions in and recommends PayPal. The Motley Fool recommends the following options: Short December 2023 $67.50 Puts on PayPal. The Motley Fool has a disclosure policy.