PayPal Stock: Buy, Sell, or Hold?

PayPal 's (NASDAQ: PYPL) stock has declined about 80% during the past three years. The digital payments leader lost its luster as its pandemic-driven growth spurt ended and it faced tougher macro and competitive headwinds. Dan Schulman, who had led the company since its spin-off from eBay in 2015, also retired last September and was succeeded by Intuit Executive Vice President Alex Chriss.

Under Chriss, PayPal has been expanding its ecosystem with new services while carefully controlling spending. That's a tough balancing act to pull off, and the bulls don't seem too eager to rush back. However, PayPal's second-quarter report on July 30 exceeded analysts' expectations on the top and bottom lines and suggested its business was gradually stabilizing. Let's dig into those numbers and review the main reasons for buying, selling, or holding this out-of-favor fintech stock .

Image source: PayPal.

The key numbers

PayPal is grappling with three long-term challenges. First, eBay replaced PayPal with its Dutch rival, Adyen , as its preferred payments platform in a five-year transition from 2018 to 2023. Second, PayPal faces stiff competition from big tech companies, other digital payment providers, and buy now, pay later (BNPL) platforms. Lastly, higher interest rates and other macro headwinds are broadly slowing consumer discretionary spending.

PayPal's active accounts peaked at 435 million in the 2022 fourth quarter but declined sequentially during 2023. But during the past two quarters, its number of active accounts rose sequentially again as its revenue growth stabilized.

Data source: PayPal. YOY = Year-over-year.

Most of that recovery was driven by PayPal's consumer-facing app and its Venmo peer-to-peer payments platform. For the third quarter, PayPal expects its revenue to grow by mid-single-digit percentages as its adjusted earnings per share (EPS) rises by high single digits.

For the full year, PayPal expects its EPS to rise by the low to mid-teen percentages on an adjusted basis and 1% to 4% on a generally accepted accounting principles ( GAAP ) basis. It didn't provide any top-line projections, but analysts on average anticipate 7% growth.

The reasons to buy or hold PayPal

PayPal's sequential growth in accounts suggests its new features -- including its streamlined checkout service FastLane, its Smart Receipts tool, and its Cash Pass rewards program -- are locking in more users. To keep up with its nimbler competitors, it's been expanding its own BNPL platform and facilitating more cross-border transfers with its own PayPal USD stablecoin.

Its adjusted operating margin rose 231 basis points year over year and 30 basis points sequentially to 18.5% in the second quarter as it trimmed expenses. As a result, its adjusted free cash flow (FCF) -- what's left of cash flow after capital investments -- grew 31% to $1.14 billion. The company plans to allocate a lot of that cash toward bigger buybacks. It's already repurchased $5 billion in shares during the past 12 months.

PayPal still held $18.3 billion in cash, cash equivalents, and investments on its balance sheet at the end of the second quarter. That gives it plenty of room to expand with more investments and acquisitions.

And at about $64 a share, PayPal's stock trades at less than 16 times the midpoint of its GAAP EPS forecasts for the full year. That low valuation should limit its downside potential as it stabilizes its business.

The reasons to sell PayPal

PayPal's headline numbers are improving, but its transaction take rate (the cut of every transaction it retains as revenue after splitting its fees with credit card processors and other payment networks) is still declining.

On an annual basis, that key metric fell from 2.89% in 2015 to 1.76% in 2023 and has never improved year over year. In 2024, that figure slipped to 1.74% in the first quarter and 1.72% in the second quarter. That decline was caused by two headwinds: competition from other payment platforms and a higher mix of transactions from Venmo and its back-end software, Braintree, which both generate narrower margins than its main payments platform.

To offset that pressure, PayPal will need to keep trimming expenses and buying back shares to boost EPS. In other words, its business is still maturing and it's running out of room to grow. It might be a decent value stock at these levels, but it also might not be a compelling play compared to higher-growth fintech companies.

Is it time to buy, sell, or hold PayPal?

PayPal's business isn't headed off a cliff, but I wouldn't buy the stock until its take rate stabilizes. If you already own PayPal, I don't think you should sell it at these historically low valuations. So for now, the best move would be to simply hold PayPal and focus on higher-growth fintech plays or cheaper value stocks in this volatile market instead.

Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Adyen, Intuit, and PayPal. The Motley Fool recommends eBay and recommends the following options: short September 2024 $62.50 calls on PayPal. The Motley Fool has a disclosure policy .