Ultimate PayPal Stock Forecast: What to Watch in 3 Years

author David Miller

2024-07-164mins

Content

PayPal (PYPL) was once a leading player in the burgeoning fintech market. After its spin-off from eBay in 2015, PayPal quickly rose to prominence as one of the world's largest digital payment platforms. Initially, it enjoyed robust growth, but over the past three years, its stock price has plunged 80%. As we look ahead, many investors are questioning whether this out-of-favor stock can bounce back over the next three years.

PayPal's Initial Success

Rapid Growth Post Spin-Off

From 2015 to 2020, PayPal experienced significant growth:

Revenue: Expanded at a compound annual growth rate (CAGR) of 18%.

Total Payment Volume (TPV): Rose at a CAGR of 27%.

Adjusted Earnings Per Share (EPS): Increased at a CAGR of 25%.

Active Accounts: More than doubled from 179 million to 377 million.

Challenges Begin to Surface

Despite this growth, two major events began to hinder PayPal's momentum:

Loss of eBay Partnership: eBay transitioned to Adyen, a Dutch competitor, as its preferred payments provider from 2018 to 2023.

Pandemic Surge: While the pandemic initially boosted PayPal's growth in 2020 and 2021, this spike masked underlying issues, which became evident once the surge lapsed.

Why Did PayPal's Growth Slow Down?

Deceleration in TPV Growth

Post-pandemic, PayPal's TPV growth began to decelerate. Additionally, inflationary pressures and declining consumer spending further exacerbated this slowdown.

Increasing Competition

The fintech landscape evolved, with big tech companies like Apple and Alphabet's Google expanding their digital payment ecosystems. Additionally, Buy Now, Pay Later (BNPL) platforms such as Affirm started gaining traction, particularly among younger and lower-income shoppers.

Efforts to Expand Ecosystem

PayPal attempted to expand its ecosystem through:

Venmo: Peer-to-peer payments app.
BNPL Tools: PayPal's own BNPL offerings.
Crypto Trading Services: Entry into the cryptocurrency market.
Braintree: Backend payment platform.

Despite these efforts, PayPal struggled to gain new users. Its annual transaction rate, the percentage of each transaction it retains as revenue, declined from 2.89% in 2015 to 1.76% in 2023.

PayPal's Turnaround Plans

Leadership Change

Dan Schulman, who led PayPal since its eBay spin-off, stepped down at the end of 2023. His successor, Alex Chriss, has a new strategy to rejuvenate growth.

New Features to Boost Transactions

Chriss aims to increase transactions from existing users through new features:

FastLane: Streamlined checkout service.

Smart Receipts: Digital receipts tool.

Cash Pass: Rewards program.

Continued Cost-Cutting and Share Buybacks

Chriss plans to continue Schulman's strategy of cutting costs and buying back shares to boost adjusted EPS. However, sustaining this balancing act will be challenging without stabilizing top-line growth.

Analysts' Expectations to PayPal

From 2023 to 2026, analysts project:

Revenue Growth: CAGR of 8%.

EPS Growth: CAGR of 9%.

While this outlook is stable, it may disappoint investors accustomed to PayPal's previous double-digit growth rates.

The Future of PayPal's Stock

Valuation and Potential Growth

Currently, PayPal's stock trades at 16 times forward earnings, reflecting its transition from a growth stock to a value stock. If PayPal meets Wall Street's earnings expectations and maintains its valuations, its stock price could rise 30% over the next three years. This would be a decent gain for a maturing fintech company, although it could still face macroeconomic and competitive challenges.

Long-Term Outlook

With 427 million active accounts, PayPal remains a significant player in the digital payment space. However, for it to be a strong recommendation, it must balance long-term growth strategies with effective cost-cutting measures.

Conclusion

PayPal's journey from a fintech giant to a struggling stock highlights the dynamic nature of the financial technology sector. While it faces challenges, strategic leadership changes and new feature rollouts offer hope for recovery. Investors should closely monitor PayPal's progress and remain cautiously optimistic about its potential turnaround.