Sometimes, a new CEO can be a game-changer for a company. Alex Chriss, formerly of Intuit, took the reins at PayPal Holdings (PYPL -0.03%) in September 2023. Since then, the stock has appreciated by over 50%, outperforming the broader market.
Things don't change overnight, but the company has begun to string together some encouraging quarters. Active account growth is gaining steam, and management raised earnings guidance in Q3. PayPal was one of the earliest financial technology (fintech) companies, and it's not easy to recapture the magic when newer, innovative competition enters the picture.
It's a great time to assess PayPal's current situation and whether the stock still has more upside for new investors after a strong 15-month rally. Here is whether PayPal is a buy, sell, or hold -- and why.
A product-level mentality is reigniting growth
Alex Chriss spent years as an executive at Intuit, holding multiple roles that affected the company's products and services. Once on board, Mr. Chriss emphasized PayPal's branded checkout platform as a central focal point. Over the past year, the company has worked on reinvigorating PayPal's top three checkout experiences and has rolled out the new versions to approximately 5% of its checkout traffic as of Q3 2024.
PayPal noted that in early testing, the new versions generated measurable results, including 100-basis-point to 400-basis-point improvements in conversions on vaulted checkout (stored payment methods) and an increase in the attachment of buy now, pay later loans to transactions by 15% to 20%. The data indicates that PayPal could notably increase engagement among its 223 million monthly active accounts as the rollout broadens.
Alex Chriss also focused on cost-cutting. PayPal's operating margin was 18.8% in Q3, a 194-basis-point improvement from roughly a year ago when he started. Management increased full 2024 earnings guidance from low to mid-teens growth to high-teens growth. It's still early, and it's unclear whether PayPal's small sample size will translate into long-term trends. Still, there's a notable pivot happening, which helps explain why the stock sprung to life over the past 15 months.
Zooming out on PayPal's 2024 stock performance
PayPal stock's strong performance since late 2023 is less impressive when you consider the bigger picture. The stock peaked at just over $300 in 2021, so PayPal remains a whopping 70% off its former high! However, there's a lot to like.
PYPL Revenue (TTM) data by YCharts
The company's steady gross margin declines were a factor in the stock's tremendous sell-off, so it's good to see signs that the trend may have bottomed and begun reversing (seen above). Again, credit goes to Chriss for aiming to focus on PayPal's branded products and services rather than unbranded payments that carry lower margins. Despite its lower margins, PayPal generates higher earnings-per-share today than in 2021 due to higher revenue.
Because the share price dropped so much, investors may not realize that PayPal managed to grow its earnings despite margin declines. Lower margins are never a good thing, but I think it underlines how good of a business PayPal is to pull that off.
Is the stock a buy, sell, or hold?
It should excite investors that PayPal earns more today than when its stock was at $300 per share. The stock trades at a forward P/E ratio of 18. Shares routinely traded between 30 and 60 times earnings until the COVID-19 pandemic. I'm not arguing that PayPal will return to those valuations, but the stock seems relatively cheap, even after rallying 50%.
Analysts estimate that PayPal will grow earnings by an average of 11% annually over the long term. That could improve if Alex Chriss continues bringing positive changes to PayPal, but even if not, the stock's PEG ratio is enticing at 1.6. I typically buy high-quality stocks at PEG ratios up to 2.0 to 2.5, so PayPal, a household brand with double-digit earnings growth, feels priced right for long-term buyers here.
Consider the stock a buy, especially if PayPal's encouraging business results keep trending in the right direction.
