Shares of PayPal (PYPL 3.05%) made big gains as pandemic-related tailwinds and low interest rates helped power bullish momentum for fintech valuations. But sentiment has since taken a decidedly bearish turn. Facing decelerating growth, high levels of inflation, and rapidly rising interest rates, the payment-services leader has seen its share price tumble 74% from its peak.
Should investors be buying on the big valuation pullback, or is there still too much risk given today’s tumultuous macroeconomics? Read on to see bullish and bearish sides of the debate presented by two Motley Fool contributors.
PayPal has the makings of a long-term winner
Keith Noonan: Despite macroeconomic challenges, PayPal managed to grow revenue 11% in the third quarter. Even though adjusted earnings per share declined to $1.08 from $1.11 in the prior-year quarter, the business is still posting strong profits, and its forward price-to-earnings (P/E) multiple has been pushed down to attractive levels.
While PayPal’s net active accounts grew only 4% year over year in the third quarter, increased purchasing across its service ecosystem helped push total payment volume up 9% to reach $337 billion. Meanwhile, operating income actually increased 29% year over year to hit $1.9 billion, and free cash flow was up 37% compared to the prior-year period at $1.8 billion.
With third-quarter revenue of $6.85 billion, the company posted net-income margins, operating-income margins, and free-cash-flow margins of 19.4%, 27.8%, and 26.3%, respectively. PayPal is already posting very strong margins, and there’s actually room for continued improvement.
Through cost-cutting, the company expects to have saved $900 million in its most recently completed fiscal year and $1.3 billion in the current annual fiscal term. PayPal has room to improve outright margins as it becomes more efficient, and things look even better on a per-share basis. With the company carrying out a substantial stock buyback, there’s another positive catalyst for earnings, operating income per share.
With the stock down precipitously over the last year and from its high, PayPal presents attractive value at current prices and looks poised to deliver impressive returns for long-term shareholders.
PayPal is up against formidable rivals
Parkev Tatevosian: Before starting my bear case for PayPal, I will say that I think it can make an excellent long-term investment. That said, understanding the bear case for any investment you intend to make is crucial.
Despite PayPal’s solid long-term prospects, its near-term growth is under pressure. Since economic reopening gained momentum, consumers are spending more time and money on away-from-home experiences like restaurants, theme parks, and concerts.
The platform’s primary competitive advantage is that it gives consumers more convenience when making online purchases. And PayPal earns revenue by taking a percentage of transactions conducted using its platform.
With e-commerce growth decelerating, consumers have fewer opportunities to use PayPal. As a result, its revenue growth has slowed to 7.5%, 9.1%, and 10.7% in its most recent three quarters. That’s a significant decrease from the revenue growth of 18.6%, 13.2%, and 13.1% in the three quarters prior to that.
Moreover, while PayPal does offer a convenience advantage over debit or credit cards across several different sites, that might not be enough to convince folks to sign up and use its services. If PayPal has difficulty attracting consumers, merchants will have little incentive to accept it as a form of payment.
Its much-more-established rivals Visa (V 1.77%) and Mastercard (MA 2.27%) have solved this problem. People looking to invest in the payments industry could be better off considering one of these two instead of PayPal.
Should you buy PayPal stock today?
For investors who take a buy-and-hold approach, there’s a lot to like about PayPal at today’s prices. The company has a leading position in its corner of the fintech industry, it trades at valuation multiples that leave room for long-term upside, and the business has plenty of room for long-term expansion as commerce increasingly migrates to digital channels.
That being said, it’s still possible that macroeconomic headwinds and other pressures will lead to more downside trading in the near term, and investors should consider challenges on the horizon and their personal risk tolerance before going all in on the stock.