PayPal Stock: An Absurdly Cheap Fintech Play

PayPal stock has been beaten down for way too long over the same old bad news

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Mar 31, 2023
  • PayPal's numerous headwinds seem mostly baked in at this juncture.
  • Apple and other tech disruptors pose a growing threat to the smaller fintechs, but PayPal is no sitting duck!
  • Key management departures are a potential cause for concern.
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PayPal (PYPL, Financial) stock has been demolished over the past two years, plunging from a peak of around $308 per share to $74 in recent weeks. Undoubtedly, the formerly hot fintech stock boomed and busted.

PYPL Data by GuruFocus

With a more palatable valuation and reduced expectations, PayPal seems like more of a value play than a growth play these days. Though there are prominent pressures ahead as consumer spending looks set to take a hit from the coming recession, I think there are reasons to be hopeful with PayPal.

The painful fall of PayPal

Undoubtedly, PayPal used to be one of the first names that came to mind when one thought of fintech. The payment processing company spun off from eBay (EBAY) and did relatively well on its own for a while. As pandemic lockdowns took hold, digital payments experienced a profound tailwind.

As PayPal shares rose to euphoric highs, more than tripling off its 2020 lows, many momentum chasers who bid the stock up to its peak may have thought that pandemic-induced tailwinds to digital payments would last forever.

When there was no Covid vaccine yet, and we knew very little about the disease, it certainly seemed like lockdowns could last for longer than expected. However, as a slate of vaccines launched and the U.S. economy reopened, we experienced a shifting of consumer habits. As it turned out, consumers actually missed going out to the physical retailers, and digital payment tailwinds may have gotten a bit ahead of themselves. The related stock bubble got even more ahead of itself, driven further by easy-money policies.

There are headwinds, but most seem more than baked in

Fast forward to today, and the market pendulum seems to have shifted to the other extreme. Undoubtedly, an economic recession could weigh on global payment volumes, perhaps taking a stride out of digital payment companies' steps. However, many bears may underestimate the magnitude of secular tailwinds that all digital payment companies face.

E-commerce and the digitization of payments trends are not dead. There's still plenty of growth to be had by betting on these trends. As more competitors hit the fintech scene, investors must be more selective about how they choose to bet on the continued rise in digital payments.

PayPal is doing its best to maintain the "stickiness" of its payment platform. The introduction of new tech-leveraging financial services could help the company unlock another leg of growth. Still, where there are outstanding market opportunities, competition is likely to take notice.

Numerous neobanks, fintech startups, and "Buy Now, Pay Later" companies took off in the years that preceded the fintech crash of 2021 and early 2022. Eventually, other speculative tech stocks followed suit, but it is noteworthy that fintech was among the first of the tech dominos to fall. Sometimes, the hottest trends are first in line to go up in a poof of smoke!

Though fintech hype has faded (generative artificial intelligence is the new hot trend), the long-term opportunity to be had in the market has not gone away. Recessions come and go. Secular trends tend to stick around for years, even decades after they kick off. In that regard, I still think PayPal stock remains one strong competitor to play the space.

The fintech scene is getting too crowded

The fintech space may have suffered one of the worst corrections in its history. However, don't expect tech companies to pull back on their spending as they look to capture the economic profits to be had from the in the still-growing digital payments market.

Last week, Apple (AAPL, Financial) quietly launched its Apple Pay Later service, sending installment-based payment providers like Affirm (AFRM, Financial) into a downward spiral. Over time, Apple is poised to improve its fintech capabilities by leaps and bounds as it focuses on services.

Though I don't expect PayPal should hit the "Code Red" button just yet, I do think companies like Apple which can utilize their massive userbases as they expand into new markets could begin floor it with disruptive fintech initiatives.

First Apple Pay, then Apple Card, and now Apple Pay Later. Next, Apple could target payment terminals. And the next thing you know, maybe Apple will be gobbling up the lunch of fintech competitors left and right.

I have no idea how PayPal can weather the ongoing competitive storm in fintech. It will be a difficult task that will require stellar management. With CEO Dan Schulman poised to retire and chief financial officer Blake Jorgensen stepping down, it's hard to be confident in PayPal's stewardship from here as growth stalls.

Final thoughts on PayPal

In recent years, management uncertainty, stronger rivals and growth-hurting macro headwinds have weighed on PayPal stock. It certainly seems like investors are in the dark right now.

That said, I believe there's reason for hope as the stock's multiples sink to new depths. Apple isn't the only company that can utilize a strong network to spark growth in new corners of fintech and digital wallets. PayPal has plenty of options.

Moreover, PayPal now looks like a value play at a price-earnings ratio of 35 and a forward price-earnings ratio of 15. Sure, there's no shortage of competition these days, but I don't think it's right for the company to be valued as an industry underdog.

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