PayPal’s User Decline Won’t Stop Its Double-Digit Upside

Key Points

• PayPal is a sitting duck for investors who missed the rally in technology stocks. 
• After falling 18% this year on fears born off a decline in net users, investors may have a value play in their hands.
• Fundamentals are still the same, with profitable KPIs rising.

After the technology sector in the U.S. led indexes like the S&P 500 and the NASDAQ to new all-time high levels, investors may realize that not all stocks enjoyed the same run as names like Nvidia Co. NASDAQ: NVDA and other semiconductor players.

Far from being in the spotlight, other stocks have yet to catch up to the technology pack, particularly now that the U.S. business cycle may be hitting a bottom. PayPal Holdings Inc. NASDAQ: PYPL is one of these stocks, underperforming the Technology Select Sector SPDR Fund NYSEARCA: XLK by as much as 53% over the past 12 months.

PayPal stock even underperformed another sector it is highly exposed to, the consumer discretionary space. Falling behind the Consumer Discretionary Select Sector SPDR Fund NYSEARCA: XLY by 36% over the year, despite being correlated by 63%, gives investors the opportunity to consider an investment in PayPal.

It Isn’t All Bad News

After reporting its first decline in net users, going from 435 million in 2023 to 431 million in 2023, PayPal stock clocked in a negative 18% performance. While justified, it may not actually be as bad as people make it out to be.

While the company suffered its first user base decline, PayPal still reported an annual increase in payment volume. From 2022 to 2023, payment volumes (in dollar terms) increased from $1.3 trillion to $1.5 trillion, meaning that the quality of users stuck to PayPal increased despite there being fewer overall users.

More granularly, annual transactions per account rose from 51 in 2022 to 58 in 2023. The company hasn’t seen a decline in transactions in ten years, taking away from the fear born of the decline in total users.

Markets tend to focus a lot on PayPal's name, forgetting that PayPal also owns the Venmo platform. Looking into Venmo, things become a bit clearer for those worried bulls. Venmo's revenue saw a healthy annual growth of roughly 10%, reaching $935 million.

Annual user and transaction value also rose over the year, cushioning the blow dealt with specifically on the PayPal platform. While speculative, Venmo’s valuation is projected to be $38 billion, nearly 50% of PayPal’s market capitalization.

The fact that Venmo could make up nearly half of PayPal’s value raises the question of whether the stock is selling at a discount, which wouldn’t be far from the truth.

It’s Still PayPal, Only Cheaper

Compared to the Internet Software industry, which trades at an average forward P/E multiple of 34x, PayPal offers a discount of 66% in its 11.4x valuation.

The company is arguably one of the strongest brands in the sector, with competitors like Paycom Software Inc. NYSE: PAYC and Block Inc. NYSE: SQ having a real presence but not the track record of PayPal.

The answer anyone is looking for, especially in justifying the bullish case for a stock that fell 80% from its all-time high of $310 a share, is whether it still has a competitive advantage.

Many other payment services are in the market, including Zelle and Apple Inc. NASDAQ: AAPL with Apple Pay. However, only PayPal offers a real third-party presence, guaranteeing customers their money if the underlying transaction is an error—or even a scam.

Zelle even has a warning message on mobile banking platforms like Bank of America Co. NYSE: BAC. The message goes something like "Treat Zelle like cash," meaning that once it's sent, it is as good as gone.

This extra layer of protection bridges typical banking transactions and the supposed ‘decentralized’ feature that cryptocurrencies offer without all the legal hassles.

Is it Still a Buy?

Institutions think it is, as the stock reported a net $24 billion institutional inflow over the past 12 months. As the U.S. business cycle hits bottom, gauged by index reports like the ISM manufacturing PMI, merchant accounts at PayPal will likely need to transact more.

A $70.5 share price target may be on the more conservative end of the spectrum, as it only calls for an 11% upside from today’s price.

Earnings per share (EPS) are projected to grow by 12% for PayPal in the next 12 months, above Apple's 8.5% and even Bank of America's 8.3%. As stock values are typically driven by their earnings, PayPal's superior growth at double-digit discounts pushes aside the brand's hiccup in a total user decline.

All things told, the stock’s price targets still carry double-digit upside.