PayPal: A Buying Opportunity or a Value Trap?

PayPal shares are down nearly 20% year-to-date after investors see the fintech giant as a “show-me” story given a troubled track record on the execution front. While PayPal’s P/E (price to earnings) ratio of around 16 suggests the stock is relatively cheap, especially when compared to peers, the real story is a bit more complicated.

Cheap Valuation

An attractive valuation is not enough to construct a bull thesis. With shares trading at the lowest levels since 2017, the challenges that PayPal faces potentially create a value trap for growth-oriented investors.

Over the last 18 months, PayPal shares declined 35%, underperforming the S&P 500 by more than 40%. Indeed, the stock experienced a substantial decline, dropping by 81% from its all-time high to its current levels as of August 2023. 

This decline could be seen as an appealing opportunity for investors. Additionally, PayPal has adjusted its strategy, moving away from aggressive acquisitions. Relatively speaking, PayPal’s fundamental valuation has improved as its share price declined, with the stock trading at its lowest trailing P/E multiple in five years.

Given the magnitude of a selloff that has taken place in the last year or so, some investors may find the stock compelling due to its attractive valuation. However, this is where it gets more complicated.

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Why PayPal May Be a Value Trap 

When analyzing PayPal’s challenges and the factors behind the selloff, it’s essential to consider the competitive landscape. At the core of PayPal’s bear thesis is the belief that the company will likely face increasing competition in the coming years, not only from fintech rivals but also tech bigwigs like Apple.

For instance, PayPal’s Venmo – which had experienced strong volume growth in the past – has recently seen a flattening in its growth trajectory. This is likely a result of increased competition from Square’s Cash App. 

In addition to the increasing competition, many analysts point to the gross profit dollar growth – a closely watched metric by investors as it considers the variations in gross margins across PayPal’s business segments – that has seen a significant slowdown.

Gross profit dollar growth became nearly flat in 2022 and has only grown by 1% year-to-date in 2023. This is a notable decline from the growth rates of 17% in 2021 and 22% in 2020. The reasons behind this sudden deceleration in gross profit growth are likely multifaceted, although two factors stand out: 1) The deceleration in PayPal’s high-margin branded checkout button growth and 2) The aggressive pricing strategy PayPal is pursuing with Braintree.

Another clear overhang over PayPal stock is the frequent management transitions. While PayPal recently introduced a new CEO, some other senior positions remain vacant, including COO, CFO, Chief Strategist, etc.

So What Does All of This Mean for PayPal Stock?

PayPal shares have been moving in a clear downtrend in recent two years as the company faces significant fundamental challenges, including the fierce competition in both branded and unbranded checkout, which could lead to slow gross profit growth and a deceleration in growth for both the top- and bottom-line. 

While the selloff has created an attractive investing opportunity from the valuation standpoint, investors should measure the valuation against looming fundamental risks, in addition to the difficult macroeconomic landscape shaped by the Fed’s higher-for-longer monetary policy approach. 

Do you think that PayPal is more likely a value trap than an appealing investment opportunity? Let us know in the comments below.