The aging fintech leader still faces plenty of long-term challenges.
PayPal‘s (PYPL 2.30%) stock has rallied 41% this year as the digital payments leader has attempted to put its struggles behind it under a new CEO. Is it still worth investing in anticipation of a long-term recovery? Let’s take a fresh look at its business model, its most pressing challenges, and its valuations to decide.
Image source: PayPal.
What are PayPal’s most pressing problems?
PayPal owns one of the world’s largest digital payment platforms, but a lot of its revenue came from its former parent company, eBay. That’s why it was worrisome when eBay replaced PayPal with Dutch competitor Adyen as its preferred payments platform from 2018 to 2023.
The pandemic temporarily masked PayPal’s loss of eBay’s business as more consumers and businesses relied on digital payments, but its growth in active accounts, total payment volume (TPV), and revenue decelerated after those tailwinds dissipated. Inflation, rising interest rates, and other macro headwinds for consumer spending exacerbated its slowdown in 2023.
| Metric | 2019 | 2020 | 2021 | 2022 | 2023 | YTD 2024 |
|---|---|---|---|---|---|---|
| Active accounts growth | 14% | 24% | 13% | 2% | (2%) | 1% |
| TPV growth | 23% | 31% | 33% | 9% | 13% | 11% |
| Revenue growth | 15% | 21% | 18% | 8% | 8% | 8% |
Data source: PayPal.
The biggest problem for PayPal is its inability to gain more active accounts. Its active accounts rose 1% year over year to 432 million in the third quarter of 2024, but that was well below the 750 million active accounts it had once planned to reach by 2025.
PayPal abandoned that long-term goal back in early 2022, and it’s clearly struggling to gain new users as it faces stiff competition from other payment platforms like Block‘s Cash App, Stripe, and ApplePay.
To offset that pressure, PayPal relied more on its Venmo peer-to-peer payments app and Braintree back-end payments platform to grow its TPV. But that’s a double-edged sword because those two higher-growth platforms actually generate lower take rates (the percentage of each transaction it retains as revenue) than its namesake platform. As a result, PayPal’s annual transaction rate has declined every year since its spin-off from eBay in 2015.
What are PayPal’s plans for the future?
So looking ahead, PayPal needs to grow its average TPV per existing account if it can’t win over new consumers and businesses. Under Alex Chriss, who took the helm as its CEO last year, it’s been rolling out new features — including the FastLane checkout service, Smart Receipts tool, and Cash Pass rewards program. It’s also been expanding its own buy now, pay later platform to counter disruptive challengers like Affirm and Block’s Afterpay, and it’s been using its own PayPal USD stablecoin to facilitate more cross-border transactions.
Those initiatives might increase the stickiness of PayPal’s ecosystem, expose it to higher-growth markets, and boost its average TPV per active account, but it’s also been aggressively cutting costs to grow its transaction margins — which actually expanded sequentially over the past two quarters. It also bought back $5.4 billion shares over the past 12 months to boost its earnings per share (EPS).
It could be tough for PayPal to balance its investments with its cost-cutting initiatives and buybacks. But for the full year, it expects its adjusted EPS to grow by the “high teens” as its free cash flow (FCF) rises 30% to roughly $6 billion. It plans to return that cash to its investors via $6 billion in buybacks.
Should you buy PayPal’s stock right now?
PayPal has survived the loss of eBay, weathered the inflationary headwinds, and is still squeezing more revenues from its existing users. From 2023 to 2026, analysts expect its revenue and EPS to grow at a compound annual growth rate of 6% and 11%, respectively. Its high-growth days are certainly over, but the stock looks reasonably valued around 18 times next year’s earnings.
Yet it’s not cheap enough to be considered a value stock, either. Therefore, I wouldn’t rush to buy PayPal’s stock at its current price under $87. Instead, I’d personally buy higher-growth fintech stocks instead of this aging market leader before it overcomes its long-term challenges.
Leo Sun has positions in Apple. The Motley Fool has positions in and recommends Adyen, Apple, Block, and PayPal. The Motley Fool recommends eBay and recommends the following options: long January 2027 $42.50 calls on PayPal and short December 2024 $70 calls on PayPal. The Motley Fool has a disclosure policy.
