PayPal Stock: Buy, Sell, or Hold? | The Motley Fool (2024)

PayPal (PYPL 2.20%) was once considered a promising play on the secular expansion of the digital payments market. But over the past five years, its share prices have declined about 36% as the S&P 500 advanced 87%.

PayPal's stock slumped as its growth cooled off, its former parent company eBay switched over to its European rival Adyen, and more competitors carved up the fragmented market. Inflation also curbed consumer spending, rising interest rates compressed its valuations, and it broadly missed its own lofty long-term goals.

So should investors buy, sell, or hold PayPal's stock at these depressed levels?

The three reasons to buy or hold PayPal

The bulls still like PayPal for three reasons:

1. Its sales growth is stabilizing.
2. Its margins are improving.
3. Its stock looks historically cheap.

PayPal's revenue only rose 7% in 2022. That represented a significant slowdown from its compound annual growth rate (CAGR) of 18% from 2015 to 2021. It struggled to gain new active accounts after more competitors entered the market, eBay shifted its merchants toward Adyen, and inflation curbed consumer spending.

But in 2023, its revenue climbed 8% as it increased its total transactions per active account by 14%. That growth was mainly driven by Braintree, which handles its unbranded backend payment services, and Venmo, its peer-to-peer payments app. Analysts expect its revenue to rise 7% in 2024 and 8% in 2025.

As PayPal's growth slowed down, it reined in its spending. In 2023, its adjusted operating margin expanded 110 basis points to 22.4% and its adjusted EPS grew 24%. Analysts expect its adjusted EPS to dip 1% this year as it ramps up its spending on newer features, followed by 10% growth in 2025.

Based on those expectations, PayPal looks like a value play at 13 times forward earnings. That's probably why PayPal's insiders purchased about 10% as many shares as they sold over the past 12 months, and why it bought back $5 billion in shares in 2023.

The three reasons to sell PayPal

Yet the bears will argue that PayPal deserves to trade at that discount for three reasons:

1. It's bleeding active accounts.
2. Its take rates are declining.
3. It lacks a meaningful moat.

PayPal ended 2023 with 426 million active accounts, which equaled a 2% decline from its 435 million active accounts at the end of 2022. It lost active accounts sequentially in each quarter of 2023. To offset those persistent losses, PayPal needs to aggressively grow its transactions per active account by rolling out new features -- but that's a wobbly strategy that could run out of steam and crush its margins.

PayPal's annual transaction take rate, or the percentage of each transaction it retains as revenue after splitting its fees with credit card processors and other payment networks, fell from 2.89% in 2015 to 1.76% in 2023 and has never improved year over year.

That decline suggests that PayPal doesn't have much pricing power in the crowded fintech market. Its growing dependence on Braintree and Venmo -- which both have lower take rates than its namesake platform -- will exacerbate that pressure.

Many of PayPal's competitors -- especially big tech companies like Apple and Alphabet's Google -- can afford to take losses on their digital payment platforms to expand their ecosystems. PayPal also doesn't have any clear competitive advantages against Adyen, Block, Stripe, and other similar players, and it's still scrambling to keep up with buy now, pay later (BNPL) platforms by hastily rolling out its own BNPL services.

Which argument makes more sense?

PayPal's high-growth days are over, and its new CEO, Alex Chriss, warned that 2024 would be a "transition year" during its latest conference call. Chriss aims to "reshape the company" with new features like its streamlined checkout service FastLane, its Smart Receipts tool, and its Cash Pass rewards program -- but he also bluntly admitted that they would make a "minimal contribution" to its revenue this year.

PayPal's stock is cheap, but I believe it will remain out of favor unless it can stabilize its active accounts and take rates. Until that happens, I think it's smarter to sell PayPal instead of buying or holding it in hopes of a long-term turnaround.