Are the best days of PayPal stock in the past?

As an early pioneer in the financial technology (fintech) industry, PayPal Holdings (PYPL 1.48%) have rewarded their shareholders in fantastic style since they were spun off eBay in July 2015. Even after plunging 66% in the past year, shares of the mobile payments leader are still up approx. 160% all the time. However, as can be seen from the latest share price movement, the company has hit a roadblock in recent quarters.

Unlike the vast majority of fintech companies today, PayPal has historically been a profit-making machine. That changed in the second quarter — the mobile payments company suffered a net loss under generally accepted accounting principles (GAAP) for the first time since the first quarter of 2014. That’s an eye-opener, to say the least, and certainly something investors should keep a close eye on over the next few quarters. Finally, will the fintech giant make a comeback or are the best days in the past?

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A second quarter (not) to remember

PayPal’s shares have certainly been a victim of the broader technology selloff linked to high inflation and rising borrowing costs, but the fintech company faces its own problems. In its second quarter, the company reported a net loss of $341 million, a drastic swing from its $1.2 billion profit in the same quarter a year ago. Fortunately, it generated a positive operating profit of $764 million, although it was down 32.2% year over year. So what happened?

Two of PayPal’s operating expenses, transaction costs and transaction and credit losses, experienced significant increases from a year ago. The company’s transaction costs increased 21% year over year to $3 billion, representing 45% of total sales. Management tracked the rise of Braintree, a mobile card payment system for e-commerce businesses. Braintree, which PayPal acquired in 2013, generally has higher expenses than fintech’s other services. To boot, management cited a changing funding mix — specifically, more normalized use of debit cards compared to last year — also for the increased transaction costs. The company’s transaction and credit losses also increased 165% year-over-year to $448 million due to ongoing insolvency proceedings and fraud related to its Venmo service offering.

How does PayPal plan to fix the problems?

While investors should keep a close eye on the company’s spending and earnings situation in the coming quarters, I think PayPal will bounce back. In its earnings report for the second quarter, management was very clear about its plans to cut operating costs. CEO Dan Schulman talked about leveraging scale to drive cost reductions across the supplier base. The company has also reduced its workforce and plans to change its real estate footprint by hiring employees in cheaper locations.

As a result, the fintech leader believes it can realize its savings target of $900 million across operational and transaction expenses by 2022. It also believes its initiatives will allow for $1.3 billion in savings by 2023. Although execution is much different than planning, it is clear that PayPal prioritizes cutting costs and increasing profits in the coming years. It will be interesting to see how the company’s cost-cutting plans pan out, but it looks like the company is heading in the right direction.

Should Investors Buy PayPal Stock?

I think PayPal will make a big comeback. Not only is the fintech leader well positioned with 429 million active users and a cash and short-term investment position of $9.3 billion, but I love where management’s head is with its ambitious cost-cutting plans. With a forward price-to-earnings ratio of just over 20 and a price-to-sales multiple of 4.3, PayPal stock appears to have reached a good entry point for long-term investors.

Over the past five years, the fintech stock has posted an average price-to-earnings ratio of 57.2 and a price-to-sales multiple of 8.8. But regardless, I think PayPal’s rich history of profitability will continue for years to come, and long-term investors should feel confident that the stock will generate market-beating returns.