PayPal (NASDAQ:PYPL) stock has been quite the disappointment after the post-pandemic online shopping boom started to fade. As we head into 2024, the Covid-19 pandemic is firmly in the rearview mirror, with many companies reducing or phasing out remote work. All this has eaten into PayPal’s ability to grow profits.
PayPal was and still is the default alternative to credit cards, with almost all major international merchants accepting its payment platform. Competitors’ payment platforms lack the universal acceptance PayPal enjoys. This begs the question: what has caused PYPL stock to slide so far from its pandemic highs?
Why Has PayPal Fallen So Hard?
The answer lies in PayPal’s user growth metrics. Its user acquisition has slowed to a crawl, dropping to nearly negative 1% year-over-year in the latest quarter compared to the blistering 24% growth seen in Q4 2020. These are not numbers Wall Street wants to see.
As a result, PayPal’s valuation has been decimated, despite the company showing excellent financial strength and an ability to deliver high single-digit sales growth by monetizing its existing user base. This hasn’t impressed Wall Street for a long time.
However, PayPal has a new CEO, and the company is making strides to restore its reputation. In the latest earnings report, PayPal handily beat estimates, with earnings per share exceeding beating estimates by more than 5% and revenue beating by half a percentage point. This signals a turning point, showing PayPal can deliver.
Of course, the user growth issue remains worrying, but I don’t think PayPal is going anywhere yet. This payment platform is universally accepted and a household name. Competitors could take some of the company’s future growth, but PayPal has shown it can grow by monetizing its sticky user base and generating solid profits.
With e-commerce recovering modestly this year, perhaps accelerating in 2023, PayPal has solid footing for a meaningful rebound. In fact, I believe the stock could reach $200 or more in five years. Stock models like Gurufocus estimate nearly $200 as the fair value within two years, so even five years seems pessimistic.
User Growth Isn’t Critical For Now
All PayPal needs is to keep demonstrating profitable growth with its existing users to please Wall Street. Earnings beats like the latest one help, too. Share buybacks are the icing on the cake.
The earnings multiple looks very cheap for a high-growth company. Based on projected 2032 earnings, PayPal’s forward price-earnings ratio drops to just 2.75-times, while its price-sales ratio falls below 0.82-times.
PayPal’s ubiquitous brand and household name provide the lasting competitive advantage it needs to drive monetization. Management emphasizes focusing on profitable growth, not unprofitable user adds.
This approach makes sense to me. PayPal has pricing power and merchants depend heavily on its platform. It can squeeze more revenue from them while controlling expenses to expand margins.
With $15 billion in cash after the latest quarter, PayPal also has a fortress balance sheet to keep buying back shares when undervalued. The new CEO seems laser-focused on maximizing shareholder value.
Patience Will Be Rewarded
In summary, PayPal retains an incredibly strong position in digital payments despite its recent growth stumble. Its brand value and merchant network present high barriers to entry.
Management knows what it takes to get back in Wall Street’s good graces – deliver profitable growth. The latest earnings beat was a good start. More will need to follow. But over a 3-5 year period, this is very achievable.
PayPal stock remains down over 80% from its highs because the market underestimates its staying power and ability to drive monetization. With a reasonable growth trajectory, the current valuation gap with PYPL stock will close.
Normalizing to modest growth estimates, PayPal has the potential to deliver 300%+ upside within five years. That can potentially turn a $50 investment to more than $200. For long-term investors, PayPal’s risk/reward looks compelling at current prices.
Naturally, near-term volatility will likely be a constant, so long as PayPal continues its growth realignment. But the opportunities far outweigh the risks over the long-run. I remain bullish on PYPL stock for 2023 and beyond.
On the date of publication, Omor Ibne Ehsan did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
