PayPal Stock: Bull vs. Bear

Facing high levels of inflation, rising interest rates, and other macroeconomic pressures, fintech stocks have gotten crushed this year. Even category-leading companies like PayPal Holdings (PYPL -2.96%) are feeling the pressure. The company’s share price has lost 54% year to date and trades down roughly 72% from the high that it hit in the summer of 2021.

Will PayPal go on to be a big winner for investors who buy shares at today’s prices, or is the company on track to continue underperforming compared to the broader market? Let’s explore the bull and bear cases for this fintech stock.

Bull case: PayPal has growth potential and looks attractively valued

PayPal is a leading provider of fintech services, but macroeconomic pressures hitting its industry and bearish momentum for the broader market have been depressing its share price lately. For long-term investors, the good news is that the core business continues to look quite strong — and the company’s share price is down to attractive levels.

Between its namesake service, Venmo, and Braintree, the company established strong brands in the digital wallets, payment processing, and e-commerce payments spaces. Despite already having tremendous scale, PayPal continues to grow its active user base at a solid clip. The company reported 429 million active users at the end of the second quarter, up 6% year over year and roughly 40% from the pre-pandemic quarter in 2019. Management expects to end the year with 10 million net new active accounts despite reduced spending on marketing and on driving user additions.

PayPal guided for sales growth of 11% this year on a currency-adjusted basis, and it still expects to record more than $5 billion in free cash flow despite the more challenging macroeconomic backdrop. The company has strong earnings growth potential thanks to a solid sales growth outlook, stock buybacks, and management’s new emphasis on reducing expenses and improving margins.

PYPL PE Ratio (Forward) data by YCharts

The company’s forward price-to-earnings ratio of 21 is well below where it’s been for most of the last couple of years, and shares look attractively valued for long-term investors. With a market cap of roughly $99.5 billion, PayPal is also trading at less than 20 times this year’s expected free cash flow. The fintech leader also has a strong balance sheet with its $5 billion net cash position.

The digital payments market looks poised for long-term growth, and PayPal seems poised to benefit as commerce increasingly moves to online channels.

Bear case: Competition and macroeconomic trends create risk

While PayPal is well established in its corners of the fintech services industry, it is also facing some tough competition. Dedicated fintech and financial services rivals including Block spirit JPMorgan Chase have competing payments offerings that could gain market share or put pressure on PayPal’s margins. The company also faces competition from Apple spirit Alphabetleading mobile platform holders that have rolled out their own digital wallets and payment services.

In addition to the highly competitive industry landscape, continued macroeconomic headwinds remain a key risk factor for PayPal. If economic conditions worsen, the company could fall significantly short of the targets that it’s laid out for this year, and growth could be harder to deliver going forward. High levels of inflation, rising interest rates, or a prolonged recession could each negatively impact the business’s user growth and average revenue per user — and stock performance could suffer in tandem.

So while digital payments and other fintech service categories look primed to benefit from secular growth trends, there are still risk factors that could cause PayPal stock to post weak results. The fintech leader’s valuation may look attractive in the context of the company’s long-term growth potential, but investors should also be considering factors that could lead to weak performance for the stock.

Should you buy PayPal stock today?

Even after big sell-offs, PayPal still has a growth-dependent valuation, and the stock may not be a good fit for investors who see competitive and macroeconomic pressures severely limiting upside potential. On the other hand, PayPal is a great company with promising long-term growth potential, strong financial foundations, and a collection of services that will likely continue to see strong engagement despite some headwinds currently at hand. For investors willing to embrace the potential for volatility in the near term, I think that PayPal stock is a worthwhile buy.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Keith Noonan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet (A shares), Alphabet (C shares), Apple, Block, Inc., JPMorgan Chase, and PayPal Holdings. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.