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After closing in the red for three consecutive years, the law of averages finally caught up with PayPal (PYPL) this year and the stock is up 48% year-to-date. The payment giant’s stock is outperforming the S&P 500 Index ($SPX), which is a welcome break given its dismal price action over the preceding three years.
PayPal shares peaked above $300 in mid-2021 and then went downhill. Most notably, the stock closed in the red in 2023 despite a broad-based rally in in the stock market.
But things are starting to look up. Its valuations were getting too cheap to ignore, and investors finally started giving it some love in 2024. PayPal still trades at less than a third of its all-time high. Does this mean that the stock can keep climbing into 2025?
PayPal Is a Transformation Play
Last year, PayPal revamped its C-suite and brought in Alex Chriss as the CEO and Jamie Miller as the CFO. Chriss has been working on transforming the business and is focusing on profitable growth. During the third quarter earnings call, he echoed his previous views and said, “We're early in our transformation journey, and we have a lot of work ahead to get to where we want to be.”
Chriss has been quite vocal that PayPal slacked on innovation and is now trying to make up for that. As part of that, the company rolled out new checkout experiences that can improve conversion. “When implemented properly, the new product experiences are resulting on average in more than 100 basis points of conversion lift for vaulted checkout and up to 400 basis points of conversion uplift for onetime checkout,” said Chriss during the Q3 earnings call.
The company has been expanding its partnerships with names like Shopify (SHOP), Fiserv (FI), Adyen (ADYEY), and Amazon (AMZN), and during the Q3 earnings call, Chriss said that “we’re actively discussing more collaborations across the industry.” PayPal is also expanding its PayPal Complete Payments service geographically. The company particularly sees Venmo and peer-to-peer money transfer as key growth areas for 2025.
However, PayPal faces some major headwinds, especially in terms of competition from the likes of Apple Pay (AAPL), Google Pay (GOOG), and Block’s (SQ) Cash App. Competitive pressure has hit PayPal’s margins and its transaction take rates have been falling. Moreover, in 2025, PayPal would earn a lower interest on customer balances, thanks to the fall in interest rates.
PYPL Stock 2025 Forecast
Of the 43 analysts covering PayPal stock, 17 rate it as a “Strong Buy” and 2 as a “Moderate Buy.” More than half of the analysts, 23 to be precise, rate PYPL as a “Hold” or some equivalent while 1 rates it as a “Strong Sell.”
PayPal stock trades close to its mean target price of $90.23 while the Street-high target price of $150 is around 68% higher than the Dec. 12 closing price. Earlier this week, Bank of America upgraded PayPal from a “Neutral” to “Buy” while raising its target price to $103. The brokerage sees PayPal as a turnaround play and is particularly bullish on the company’s free cash flow generation capacity which is it almost entirely using for share buybacks.
Notably, PayPal expects to repurchase $6 billion worth of its shares in 2024, which at current prices, is a 6.7% buyback yield. The company’s free cash flows are expected to accelerate further over the next couple of years and Wolfe Research believes that PayPal’s management might even consider initiating a dividend.
Is PayPal Stock Still a Buy?
PayPal currently trades at 19.3x its expected earnings over the next 12 months. While the valuations are not exorbitant and PYPL trades below what an average S&P 500 Index constituent trades at, I believe the bulk of valuation rerating is now behind us. While PayPal’s valuation multiples could still expand from these levels, earnings growth would need to do the heavy lifting in 2025. Also, while the company has grabbed onto some low-hanging fruit as part of its transformation, future gains could be harder to come by.
While PayPal’s earnings per share (EPS) are expected to rise by over 20% this year, analysts expect the metric to rise by only about 7% in 2025. I believe the estimates are a bit conservative and imply that PayPal’s 2025 earnings would be similar to this year, considering the company’s buyback yield. However, at these levels, the margin of safety in PayPal stock is a lot lower than it was earlier this year. While I won’t sell the stock and continue to hold it for the long term, I don’t find the valuations enticing enough to trigger a fresh buy.
