What can be anticipated for PayPal's share price within the upcoming year?
What can be anticipated for PayPal's share price within the upcoming year?
PayPal Inc. (PYPL, decreasing by -1.45%) is back in the investor's good graces once again. After numerous years of underwhelming returns, it has a fresh CEO and a revitalized strategy, leading to a 44% surge in its stock price this year. This is a market-beating performance, but it's only a 140% increase since its initial public offering in 2015, lagging behind the S&P 500's 246% growth.
Can it extend this new momentum into 2025 and beyond?
Embracing New Horizons
PayPal faced the threat of becoming obsolete as rival payment platforms proliferated during the pandemic, but it's finding its footing by evolving from a payments platform to a commerce platform. This shift involves addressing customer issues more effectively and forging partnerships with other global commerce giants to broaden its influence.
Some of its notable new offerings include Fastlane, an instant checkout solution, and a one-page checkout. These are the kinds of innovations that competing payment brands have been spearheading, and PayPal missed out on.
While active account growth remains modest, existing accounts are steadily increasing rather than decreasing. PayPal boasts 432 million active accounts, a substantial number that is challenging to expand. Recently, it has focused on boosting engagement with existing users, a goal it's been achieving successfully; transactions per active account rose by 9% year-over-year in the third quarter. If PayPal's new offerings and collaborations prove successful, an increase in new users should follow suit.
In the coming year, expect PayPal to expand its newer offerings into more regions, resulting in increased engagement, enhanced conversions, and the addition of new accounts.
Ongoing Challenges
Third-quarter progress was promising, with total payment volume (TPV) rising by 9% year-over-year, revenue ticking up 6%, and transaction margin dollars increasing by 8%. Transaction margin dollars are a crucial aspect of PayPal's growth since most of its expansion has been driven by its low-margin Braintree business.
However, not all growth is created equal. The shift to Braintree and its lower margins has impacted PayPal's bottom line, and one of CEO Alex Chriss' goals has been to realign the pricing and enhance margins.
PayPal is enhancing the Braintree package to make it more valuable and competitively priced, which contributed to a 6% increase in GAAP earnings per share (EPS) and a 22% surge in non-GAAP EPS during the third quarter, leading to significant gains in free cash flow.
The Braintree shift is driving higher transaction margin dollar growth, but PayPal's gross margin remains well below its levels five years ago. With its expanded business, this might be the new norm for PayPal. Investors should monitor the gross margin's trajectory.
Management enhanced its full-year forecast for non-GAAP EPS growth to increase in the high teens, and Wall Street anticipates a 7% increase next year.
A Year of Promise and Uncertainty
Being a substantial company meaningfully reduces its potential to qualify as a growth stock. It is not a straightforward call to categorize it as a value stock either, given the inherent risks. Despite trading at 18 times forward one-year earnings and 13 times trailing-12-month free cash flow, it is only considered cheap if it is undervalued, and the price is likely to appreciate to its true value.
I am not confident enough to recommend buying it as a solid investment. Although it boasts formidable assets, unparalleled dominance in digital payments, and a trusted brand, it continues to struggle in strategic areas.
As it addresses these challenges, it could continue its impressive performance in the upcoming year. However, there is a significant degree of uncertainly. Growth investors may prefer a faster-growing stock, while value investors might look for a more consistent performer. I would not abandon PayPal completely, but I do not believe it offers sufficient allure for investors at the present moment.
In the context of enhancing PayPal's offerings and attracting new users, the company might need to allocate a significant portion of its financial resources towards investing in innovative technologies and strategic partnerships. This investment in finance could lead to substantial returns in the long run, as it helps PayPal stay competitive in the rapidly evolving digital payments market.
PayPal's strategy of expanding its offerings into more regions could have a positive impact on its financial health. This expansion could potentially increase PayPal's revenue stream, making it an attractive investment option for those interested in the finance and money markets.