PayPal Holdings (PYPL -1.45%) is finally in the market’s favor again. After several years of disappointing results, it has a new CEO and a new way forward, and the stock is up 44% this year. That’s a market-beating performance. But it’s up only 140% since its initial public offering in 2015, underperforming the S&P 500‘s 246% gain.
Can it continue this new streak into 2025 and beyond?
Harnessing new opportunities
PayPal was in danger of becoming a dinosaur as competition multiplied in the pandemic era, but it’s getting a handle on how it can spring back to life. It’s transitioning from what it calls a payments platform to a commerce platform, creating more effective solutions to client challenges and partnering with other global commerce giants to expand its brand and reach.
Some of its significant new products are Fastlane, which is a type of instant checkout, and one-page checkout. These are the kinds of innovations that competing payment brands were creating and where PayPal began to lag.
Active account growth is still weak, although accounts are moving up instead of down. PayPal has 432 million active accounts, which is massive, and it’s not easy to grow that kind of number. For a while now, it’s been more focused on increasing engagement with current users, and that’s still going well — transactions per active account were up 9% year over year in the third quarter. If PayPal’s new products and partnerships are paying off, you’ll want to see it show up in new users.
In a year from now, expect PayPal to roll out its newer products across more regions and for that to lead to greater engagement, higher conversions, and more new accounts.
There’s still work to do
Healthy progress was made in the third quarter. Total payment volume (TPV) increased 9% year over year, revenue was up 6%, and transaction margin dollars increased 8%. The transaction margin dollars are an important piece of PayPal’s progress because, for a while now, most of its growth has been coming from its low-margin unbranded checkout business, Braintree.
Not all growth is the same, though. The shift to Braintree and lower margins has been weighing on the bottom line, and one of CEO Alex Chriss’ objectives has been to price it according to its value and reshape the margins.
PayPal is adding more services to the Braintree package to make it more valuable and competitively priced. Generally accepted accounting principles (GAAP) earnings per share (EPS) were up 6%, and non-GAAP EPS increased 22% in the third quarter, contributing to meaningful increases in free cash flow.
The Braintree shift is leading to higher transaction margin dollar growth, but PayPal’s gross margin is still much lower than it was five years ago. With its expanded business, this might be the new normal for PayPal. Investors should be keeping an eye on which way the gross margin is going.
Management raised its full-year outlook for non-GAAP EPS growth to increase in the high teens, and Wall Street is expecting it to increase about 7% next year.
A year of potential…and uncertainty
It’s not a problem that PayPal is already so big. It just means it’s harder to call it a growth stock. However, I’d hesitate to call it a value stock right now because there’s more risk than I would want to see for that label. It’s definitely a cheap stock, trading at 18 times forward one-year earnings and 13 times trailing-12-month free cash flow. However, it’s only a bargain if it’s undervalued, and you could expect the price to rise to meet its true value.
On that point, I’m just not confident enough to call this a solid buy. While it has tremendous assets, an unmatched presence in digital payments, and a trusted brand, it’s still struggling in certain key areas.
As it gets them under control, it could continue to outperform next year. But there’s a lot of uncertainty. Growth investors are liklely looking for a faster-growing stock, and value investors will likely want a more reliable winner. I wouldn’t give up on PayPal at all. I just don’t think it brings enough to the table for investors at this stage.
Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends PayPal. The Motley Fool recommends the following options: long January 2027 $42.50 calls on PayPal and short December 2024 $70 calls on PayPal. The Motley Fool has a disclosure policy.
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