PayPal Holdings (PYPL) stock looks set to close in the red in 2023, which would mark the stock's third consecutive year of losses. The fintech company’s shares had previously fallen 62% in 2022, notching its worst yearly performance since its 2015 split with eBay (EBAY).
Prior to that, 2021 was no better, as PayPal lost almost a fifth of its market cap in the year. Investors can take little heart from the fact that the 2023 drawdown in PayPal shares was the shallowest that we have seen in the last three years, and the stock rebounded from multi-year lows that it hit during the year.
There are many “laws of averages” in the markets. Some traders follow stock’s moving averages and sell shares when they breach crucial support levels, like the 50-day moving average. Many other disciplined long-term investors follow what’s known as “dollar-cost averaging,” where one invests a fixed number of dollars on a regular basis.
Will the Law of Averages Catch Up with PayPal Stock?
There is another law of averages that plays out not only in financial assets, but also in other areas like sports, where some like to bet on the “losers” in the hope that the law of averages will catch up with them, leading their performance to improve and revert towards the mean.
We saw something of the sort in U.S. stock markets in 2023, as the price action of S&P 500 Index ($SPX) constituents was virtually a mirror image of 2022. Names like Tesla (TSLA), Nvidia (NVDA), and Meta Platforms (META) were among the worst-performing names last year, but are among the top 10 S&P 500 gainers in 2023.
PayPal is a notable exception here, as the stock is also among the top 100 S&P 500 losers in 2023. So, will the “law of averages” come into play in 2024, helping PYPL stock to finally stage that elusive rebound? We’ll explore in this article, beginning with a look at why the once red-hot fintech stock been so out of favor with the markets.
Why Is PayPal Stock Falling?
While PayPal stock’s price action might seem disheartening for those holding the stock, the underperformance is not without reason, as there are multiple headwinds the company faces. These include:
- Slowing e-commerce sales: The percentage share of e-commerce sales in total U.S. sales peaked at around 16.5% in Q2 2020 amid the COVID-19 lockdowns but currently stands at around 15.6%. Investors made a false assumption that the high growth rates that digital payment companies saw during the lockdowns would continue over the long term. That, however, is not the case as we now know with the benefit of hindsight.
- Slowing revenue growth: PayPal’s revenue growth is now down to single digits, which is less than half of the strong double-digit growth that it witnessed between 2020 and 2021. To make things worse, its active user count also fell in the most recent quarter.
- Margin pressure amid rising competition: With rising competition, digital payment companies have been feeling pressure on their take rate (the fees they charge for processing the transaction). PayPal’s GAAP operating margin, which hit 18.1% in Q2 2020 despite higher credit losses that quarter, fell to 15.7% in Q3 2023. Its branded business has been under particular pressure, which has further compressed its margins.
- Valuation multiple compression: PayPal has also seen a compression of its valuation multiples amid the pessimism around its shares.
PYPL Stock 2024 Forecast
PayPal has reshuffled its C-suite, and has a new CEO and CFO trying to revive the company’s sagging fortunes. PYPL’s 2024 forecast looks positive, and I believe the worst is over for the company.
First, PayPal has a strong network effect, and during its Q3 2023 earnings call, it reiterated that 70% of U.S. adults have used PayPal in the last five years. The company is also trying to increase its target market and recently launched the Venmo Teen account. PayPal is also expanding its buy-now-pay-later (BNPL) business, and has partnered with KKR to purchase eligible BNPL loan originations in Europe.
During the company’s Q3 2023 earnings call, CEO Alex Criss was quite upfront about the company’s business strategy, and said, “What I care about most is high-quality customer growth and profitable revenue growth.” He emphasized, “Going forward, PayPal will be focused on generating real profit for the company.”
Incidentally, the accounts that PayPal lost in the most recent quarter were what it called “low quality customers.” However, the company added that the customer churn has been lower as compared to what it had expected.
Criss also rued the company’s high-cost structure and added, “We have opportunities to accelerate our revenue growth while reducing our expenses, helping further drive operating leverage.”
PayPal Stock Looks Like a Good Buy for 2024
To be sure, the law of averages does not always play out as expected, especially with low-quality stocks which only continue to get cheaper. However, I believe it might work to the benefit of PYPL stock in 2024, especially as the company fine-tunes its business strategy under the new leadership team. Its valuations also look compelling, with a forward price-to-earnings-to-growth multiple below 1 - which looks attractive, considering the broader market valuations.
Overall, I am doubling down on PYPL stock, expecting it to rebound from the current price levels amid a combination of increasing earnings and an expected expansion of its valuation multiples.
On the date of publication, Mohit Oberoi had a position in: PYPL , META , NVDA . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
