PayPal Holdings (NASDAQ:PYPL) may tempt contrarian investors. Right now, PYPL stock trades for only 10.8 times earnings. A very low valuation, when compared to their competitors’ valuations. Square and Cash App parent Block (NYSE:SQ), for example, trades at a relatively lofty 25.2 times forward earnings. Other popular fintech names, like SoFi Technologies (NASDAQ:SOFI), have yet to reach profitability.
Still, before you run out and grab a position in PayPal, on the view that it’s a deep value play among the fintechs, keep in mind that there’s a very good reason the market is currently pricing this stock at such a discounted valuation. Although Mr. Market can give in to fear, uncertainty and doubt, and push a stock to oversold levels, that does not appear to be the case with this stock today. Here’s why.
PYPL Stock: Dirt Cheap for a Reason
Fintech stocks have sold off considerably, in response to Federal Reserve’s continued moves to elevate interest rates, and PayPal is no exception. Higher interest rates bode badly for economic growth. They also have a negative impact on stock valuations.
Slowing growth and multiple compression helps to explain why PYPL stock has gone from richly-priced at over $300 per share to dirt-cheap in the low $50s per share, since 2021. Yet while underwhelming growth has pushed shares into value territory, don’t assume that it can’t get worse from here.
Sure, during Q2 2023, Paypal’s revenue grew by 7%, and earnings (on a non-GAAP basis) increased by 24%. However, as I discussed earlier this month, during that very same quarter, PayPal’s user numbers increased by just 0.47% year-over-year, and declined on a sequential (quarter-over-quarter) basis. Competition from a “Magnificent Seven” tech giant may be to blame for this sluggish growth.
But whatever the reason (competition, softening demand from consumers), in time, a lack of user growth will likely start to have an impact on PayPal’s top and bottom lines. With this, the market is taking a ‘show me” view regarding the company’s turnaround plans. Such a view is warranted.
Why a New CEO May Not Necessarily Save the Day
There’s a new CEO at the helm of PayPal. Last month, CEO Dan Schulman stepped down, and Alex Chriss is now the one tasked with turning the company around. Some may believe that Chriss, a former exec at Intuit (NASDAQ:INTU) has what it takes to get things back on track, sparking a comeback for PYPL stock.
Yes, given his experience managing the operations of Intuit platforms like Quickbooks and Mailchimp, he may help the company experience a rebound in growth for its enterprise-focused offerings. However, Chriss’s talents may not be as effective at mitigating the competition issue, which is affecting the consumer-facing segments of its business.
Besides competition, if economic conditions worsen before improving, this could affect not just the performance of PayPal’s core payments business, but its fledgling “buy now, pay later” segment as well. As if there wasn’t enough on Chriss’s plate, the new CEO also needs to figure out how to mitigate PayPal’s declining margins.
Only time will tell whether Chriss can save the day for PayPal. There is little risk in taking a “wait and see” view for now.
The Verdict: Sit Tight for Now
Sure, there may be the potential for fast gains, if you buy PYPL today, around a week before its next earnings release. Sentiment going into earnings may lean bearish, but any sort of positive take away from the results/updates to guidance could result in a big move higher.
Even so, it’s not as if you’ll miss the boat buying after promising news, rather than in anticipation of it. Given that the market is still working through big time issues like inflation and interest rates, any recovery for PayPal is going to play out slowly.
There’s no need to rush into a position. Sit tight for now, and wait for more news to arrive. Although PYPL stock could rally post-earnings, it could just as easily slide again, on lackluster results and disappointing guidance.
PYPL stock earns a D rating in Portfolio Grader.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
