Is PayPal Stock a Buy?

PayPal (PYPL 0.86%) posted its first-quarter earnings report on April 30. The digital payment leader’s revenue grew 9% year over year to $7.7 billion and exceeded analysts’ consensus estimate by $180 million. Its adjusted EPS rose 27% to $1.08. But starting this year, the company redefined how it calculates its adjusted EPS. Based on its old definition, its adjusted EPS rose 20% to $1.40 and surpassed the consensus forecast by $0.18 per share.

PayPal’s stock rose slightly after that earnings beat, but it quickly gave up those gains and remains down about 8% over the past 12 months. It’s also trading nearly 80% below its all-time high from July 2021. Should investors buy PayPal’s stock as a turnaround play? Or will it continue to disappoint investors with its lackluster growth rates?

Reviewing PayPal’s biggest problems

PayPal is still one of the world’s largest digital payment platforms, but its moat is shrinking. Big tech companies like Apple and Alphabet‘s Google are creeping into its backyard with their own payment services, while other fintech companies like Adyen, Block, and Stripe are carving up the rest of the fragmented market.

PayPal once enjoyed a robust relationship with its former parent company eBay, but the e-commerce giant replaced PayPal with Adyen as its preferred payments platform via a five-year transition from 2018 to 2023. That decoupling throttled PayPal’s growth, and inflationary headwinds exacerbated that slowdown.

PayPal’s total number of active accounts peaked at 435 million in the fourth quarter of 2022. That figure declined sequentially throughout all of 2023, but finally rose sequentially again in the first quarter of 2024. As PayPal’s user growth stalled out, it has squeezed more revenue from its existing users by driving more transactions through peer-to-peer payments app Venmo and its Braintree backend payments software.

Data source: PayPal. YOY = year over year.

Unfortunately, Venmo and Braintree both have lower transaction take rates (the percentage of each transaction it retains as revenue after splitting its fees with credit card processors and other payment networks) than PayPal’s namesake services.

PayPal’s growing dependence on Venmo and Braintree, along with its inability to gain new users, caused its transaction take rate to decline from 2.89% in 2015 to 1.76% in 2023. That key metric dipped to 1.74% in the first quarter of 2024.

What’s PayPal’s turnaround strategy?

New CEO Alex Chriss took the helm last September and expects 2024 to be a “transition year” in which PayPal expands its ecosystem with new features — including its FastLane checkout service, its Smart Receipts tool, and its Cash Pass rewards program — to grow its revenue per user. The increased adoption of its own PayPal USD stablecoin, which is pegged to the U.S. dollar, could also streamline its cross-border transfers.

The company also plans to carefully control its spending as it expands. Its adjusted operating margin (which was redefined to more accurately reflect its stock-based compensation and payroll expenses) expanded 84 basis points year over year to 18.2% in the first quarter. The company aims to generate $5 billion in free cash flow (FCF) for the full year — up from $4.2 billion in 2023 — and to spend “at least” $5 billion of that total on buybacks.

However, PayPal expects its revenue to only rise 6.5%-7% year over year on a currency neutral basis in the second quarter — compared to its 10% growth on the same basis in Q1 — as its adjusted EPS grows by a “low double-digit” percentage.

PayPal didn’t provide any revenue guidance for the full year, but analysts expect a 7% increase on a reported basis, compared to its 8% growth in both 2022 and 2023. The company forecasts that its full-year adjusted EPS should increase by a “mid to high single-digit percentage,” which is in line with analysts’ expectations for a 6% jump.

Based on those expectations, PayPal’s stock still looks cheap at 15 times forward earnings, but it could continue to trade at that discount until a few more green shoots appear.

So is it the right time to buy PayPal?

It’s easy to see why PayPal’s stock plunged, but it’s hard to see how it bounces back over the next few quarters unless it stabilizes its user growth, increases its take rates, and meaningfully widens its competitive moat. So for now, I’d avoid PayPal and stick with more promising tech companies with clearer competitive advantages.