PayPal stock: an absurd chea

PayPal (PYPL, Financial) shares have been on a tear over the past two years, plunging from a peak of around $308 a 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 lowered expectations, PayPal seems more like a value play than a growth play these days. While there is prominent pressure going forward as consumer spending looks set to be hit by the coming recession, I think there is reason to be hopeful about PayPal.

PayPal’s Painful Fall

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

As PayPal shares soared to euphoric heights, more than tripling 2020 lows, many momentum chasers bidding the stock to the top may have thought the pandemic-induced tailwind 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 shutdowns could last longer than expected. However, as a number of vaccines were launched and the US economy reopened, we experienced a change in consumer habits. It turned out that consumers actually missed going out to the physical retailers, and digital payment tailwinds may have gotten a little ahead of themselves. The related stock bubble got even further ahead of itself, fueled by easy money politics.

There is a headwind, but most of them seem more than baked

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 step out of step for digital payment companies. However, many bears may underestimate the extent of secular tailwinds that all digital payments companies face.

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

PayPal does its best to maintain the “stickiness” of its payment platform. The introduction of new technology-enabled financial services can help the company unlock another leg of growth. Still, where there are outstanding market opportunities, competition is likely to take notice.

Numerous neo-banks, fintech startups and “Buy Now, Pay Later” companies took off in the years leading up to the fintech crash of 2021 and early 2022. Eventually, other speculative tech stocks followed suit, but it’s notable that fintech was among the first of the technological dominoes to fall. Sometimes the hottest trends are first in line to go up in a puff of smoke!

Although the fintech hype has faded (generative artificial intelligence is the new hot trend), the long-term opportunity to be in the market has not disappeared. Recessions come and go. Secular trends tend to stick around for years, even decades after they start. In that regard, I still think PayPal stock remains a strong contender to play the spot.

The fintech scene is getting too crowded

The fintech space may have suffered one of the worst corrections in history. However, don’t expect tech companies to cut back on their spending as they try to capture the financial profits from the ever-expanding digital payments market.

Last week, Apple (AAPL, Financial) quietly launched its Apple Pay Later service, sending installment payment providers such as 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.

While I don’t expect PayPal to hit the “Code Red” button just yet, I do think that companies like Apple, which can leverage their massive user bases as they expand into new markets, can begin 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 eating the lunch of fintech competitors left and right.

I have no idea how PayPal can handle the ongoing competitive storm in fintech. It will be a difficult task that will require amazing leadership. With CEO Dan Schulman set to retire and CFO Blake Jorgensen stepping down, it’s hard to be confident in PayPal’s stewardship from here when growth stops.

Final thoughts on PayPal

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

That said, I think there is cause for hope as the stock’s multiples sink to new lows. Apple is not the only company that can use a strong network to create growth in new corners of fintech and digital wallets. PayPal has many options.

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