PayPal Holdings (NASDAQ: PYPL) has faced significant challenges on Wall Street in recent years, losing much of its stock value. However, recent developments suggest that brighter days may lie ahead for this once-prominent stock. The key question now is whether there is still an opportunity for investors, or if the chance to buy has passed.
PayPal’s Enduring Appeal
Despite its struggles, PayPal remains a trusted name in the digital payments space. With over 400 million active users worldwide, the platform’s reach surpasses the combined populations of the United States, Canada, and several other countries. PayPal’s strong brand presence and reputation ensure that it remains a key player in the digital payments landscape.
Recognizing the need for revitalization, PayPal brought in a new CEO to guide the company through this challenging period. The company continues to hold its top brand status and is taking steps to protect its position in the market.
One of the most notable updates from PayPal’s recent earnings report is the stabilization of its active accounts. Previously, the company experienced account losses as it focused on eliminating less active users and concentrating resources on more engaged customers. While this led to higher transaction rates, it also caused some churn. However, the recent report indicates that this churn has halted, at least for now, which is a positive sign for the company’s future.
The earnings report also highlighted several other encouraging metrics. Revenue (on a currency-neutral basis) increased by 9% year over year, surpassing the company’s guidance of 7%. Total payment volume (TPV) grew by 11%, the adjusted operating margin expanded by 2.3 percentage points to 18.5%, and adjusted earnings per share (EPS) rose by 36% to $1.19.
Challenges Ahead for PayPal
While PayPal operates an asset-light business model, primarily offering services rather than products, it still faces significant challenges. The company does offer hardware, such as point-of-sale devices, but this represents a small portion of its overall business. As a service-based company, PayPal should ideally maintain a high gross margin, but recent years have seen some erosion in this area.
PayPal’s growth over the past few years has largely been driven by its white-label service, Braintree, which operates under an unbranded checkout model. While this has generated revenue, it has done so at lower profit margins, putting pressure on the company’s bottom line.
In the second quarter, PayPal’s branded checkout TPV, which operates under the PayPal name, grew by only 5% year over year and accounted for 28% of total TPV. In contrast, unbranded checkout TPV, driven by Braintree, increased by 28% and accounted for 34% of total TPV. This shift highlights the challenge PayPal faces in balancing growth with profitability.
CEO Alex Chriss has acknowledged the contribution of Braintree to transaction margin dollar growth, marking the first significant impact in over two years. Chriss has emphasized the need to align pricing with the value provided to clients, and the company is making adjustments to its unbranded pricing structure. This strategic move aims to fully leverage PayPal’s pricing power, which has not been fully utilized in recent years.
Simultaneously, Chriss is focused on revitalizing growth in branded checkout. Since taking the helm, he has worked diligently to enhance the user experience for PayPal customers, with the goal of driving growth in this core area.
A Promising Future for PayPal
The market has responded positively to PayPal’s recent developments. Since the release of its second-quarter report on July 29th, PayPal’s stock has risen by 23%, reflecting renewed investor confidence in the company’s direction.
Despite the recent gains, PayPal’s stock remains down 73% over the past three years. While early investors may have missed out on the recent uptick, there are indications that the stock has room to climb further. For long-term investors, PayPal presents an attractive opportunity as a value stock with potential for sustained growth.
In conclusion, while PayPal still faces challenges, the company’s recent moves and strong brand position suggest that it is on the right track. Investors who believe in the company’s ability to navigate these challenges may find that it is not too late to invest in PayPal stock.
