The fintech powerhouse is making a lot of changes.
A lot has changed at PayPal Holdings (PYPL 1.80%) recently. Chief Executive Officer Alex Chriss took over a year and a half ago and set new strategies into motion, and the stock price is up more than 30% during the past year. It was up even more, but the shares fell after the company released its fourth-quarter earnings report last week.
Investors had been excited about a turnaround, and there’s been healthy progress, but the market was disappointed in the latest update.
Revenue: Steadily increasing
Revenue growth hasn’t been PayPal’s problem, although it has decelerated since the early days of the pandemic lockdowns, when everyone was shopping online and the company had some of its best quarters ever. In the latest quarter, revenue increased 4% year over year, and it was up 7% for the full year.
An excellent indicator of how the business is doing is how its active accounts and monthly actives are changing over time.
| Metric | Q1 2024 | Q2 2024 | Q3 2024 | Q4 2024 |
|---|---|---|---|---|
| Active accounts | 427 million | 429 million | 432 million | 434 million |
| Active accounts % change (YOY) | (1%) | 0% | 1% | 2% |
| Monthly active accounts | 220 million | 222 million | 223 million | 229 million |
| Monthly active accounts % change (YOY) | 2% | 3% | 2% | 2% |
Data source: PayPal. YOY = year over year.
PayPal reached a peak of 435 million active customers in 2022’s fourth quarter, and its loss of customers in subsequent periods was an indication of its slowing momentum. Now that metric is growing again. It’s still not back to its peak level, but it’s getting close. Engaging with customers is the first step to unlocking more of the platform’s value.
Top-line gains could continue to slow down in the near term as it prioritizes higher-margin growth over general revenue growth.
Profits: Rebounding
What’s been bothering investors about PayPal during the past few years is that despite its revenue growth, margins have been narrowing and profits have been underwhelming.
Part of the problem is that a lot of its growth has been coming from its Braintree business, or what it calls “unbranded checkout.” Braintree was a company that PayPal acquired, and it provides white-label financial services to business clients. Because it’s a type of wholesale business, its gross margins are lower than those of the PayPal branded checkout business. Since this is where volume has been growing, these lower margins are trickling through to the entire company.
PYPL Gross Profit Margin (Quarterly) data by YCharts.
You’ll notice that there’s been a recent uptick, and that’s because one of Chriss’ goals has been to shift the company toward a price-to-value strategy — basing prices on what customers view as the value of its services, as opposed to what they cost to deliver or the prices that rivals charge for similar offerings. He’s working to price Braintree products at their true value to clients. That should widen margins, although it’s also costing PayPal some business.
The market wasn’t thrilled with the fourth-quarter results. Management highlighted a 7% year-over-year increase in transaction margin dollars, or 5% adjusted. Operating income, however, fell by 17% year over year, and earnings per share (EPS) declined to $1.11, a 15% fall from a year earlier. Full-year EPS increased 4% to $3.99.
Management has forecast for significant EPS increases for 2025’s first quarter and for the full year. As the changes PayPal is making start kicking in, expect higher profit.
Business: Shifting with the times
Even though PayPal still doesn’t have quite as many active accounts as it did at its peak, it has a vast active customer base that’s more than the populations of the U.S. and Canada combined. It’s starting from an excellent position, and if it can reengage customers who have fallen away, as well as increase its engagement with its existing base, it will be well on its way toward reigniting its business. The way it’s doing that involves completely revamping its checkout options, and so far, the results have been positive.
I envision incrementally higher engagement over the next year, along with more innovation and improved features to keep up with the competition. Chriss has proven adept at figuring out the tech part of this equation, which is the key to unlocking greater value from its active member base.
Before Chriss’s arrival, management was focused on adding customers at the expense of active customers. PayPal has flipped that dynamic, and although the number of active customers is now on the rise, the growth in the average number of transactions per customer is decelerating, and the total number of transactions declined year over year in the fourth quarter. Management says this is a short-term result of its pricing increases in the Braintree segment, and asserts that it will result in higher margins and profitability over time. Investors will want to keep an eye out for progress on that front over the next year.
Stock: Rewarding shareholders
At its current price, PayPal stock trades at a price-to-earnings (P/E) ratio of about 19 — close to a 10-year low. That looks like a great entry point for investors who have been on the fence.
Although you can never know with certainty where any stock will be in a year, PayPal’s outlook is harder to predict than average because there’s so much about the company that is in flux. I see it continuing to demonstrate steady progress, and its new CEO is inspiring confidence. Although PayPal stock isn’t a great candidate for the risk-averse investor, it should reward patient investors over the next year and beyond.
Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends PayPal. The Motley Fool recommends the following options: long January 2027 $42.50 calls on PayPal and short March 2025 $85 calls on PayPal. The Motley Fool has a disclosure policy.
