Is It Too Late to Buy PayPal Stock?

PayPal Holdings (PYPL 0.47%) has been a loser on Wall Street for a long time. It lost its way and much of its stock value over the past few years, but things might be brightening up. Is there still a runway ahead, or did you miss the chance to buy this once-hot stock?

PayPal hasn’t lost its cachet — yet

There are more than 400 million people in the world who have a PayPal account. That’s more than the entire population of the U.S., plus Canada and a few more countries. PayPal is a trusted platform to use for purchases and digital payments, and no one should think that PayPal is done for.

It made the right move to bring in a new CEO when growth began to fade and it looked like the company needed a refresher. It still has its top brand and platform, and it’s making the necessary changes to protect that.

Something that stood out to me in the most recent earnings update is that active accounts remained steady. PayPal was losing accounts for a while. Management had explained that it was letting go of less active accounts and focusing its resources on its more active customers. That led to account churn but higher transaction rates. Maybe so, but it’s important to keep an eye on those numbers, because a company can’t squeeze more transactions out of the same customers forever. It looks like the churn has stopped, at least for now.

There were many more positive updates. Revenue (currency neutral) increased 9% year over year, beating guidance of 7%. Total payment volume (TPV) was up 11%, adjusted operating margin expanded 2.3 points to 18.5%, and adjusted earnings per share (EPS) increased 36% to $1.19.

There’s still work to do

PayPal is an asset-light business. It’s mostly service-based, although it does offer hardware like point-of-sale devices. It should have a high gross margin, but look what’s happened to it over the past few years.

PYPL Gross Profit Margin (Quarterly) data by YCharts

Other than some of the hardware, which isn’t a large percentage of PayPal’s business or costs, the “products” it sells are business-to-business services. PayPal’s biggest growth driver over the past few years has been through its white-label service under the Braintree name, or what it refers to as unbranded checkout. That’s a kind of wholesale business, which has generated lower-profit revenue for PayPal. Braintree’s higher-but-not-as-profitable revenue has been weighing on the bottom line.

Branded checkout TPV, which is under the PayPal name, increased only 5% year over year in the second quarter and accounted for 28% of TPV, while undbranded checkout increased 28% year over year and accounted for 34%. It’s easy to see what’s going on here. CEO Alex Chriss noted that Braintree is “meaningfully contributing to transaction margin dollar growth for the first time in over 2 years.” Since he’s joined, Chriss has talked about bringing “price to value,” and he’s worked on correcting the unbranded price structure to meet the value it creates for clients. As the leader here, PayPal has pricing power that it hasn’t been fully flexing. That’s bearing fruit.

At the same time, Chriss’ work is to revive growth in branded checkout. That’s what he’s been working on, feverishly, since he took over. The company is heavily focused on creating a positive and simplified experience for PayPal users to drive growth.

It’s never too late to buy a great stock

It wasn’t just me that welcomed PayPal’s news. PayPal stock has been rising since the second-quarter report was released on July 29th. Since then, it’s up 23%.

At this price and with its current trajectory, PayPal seems to moving in the right direction. There’s still work to do, but the path looks clearer now. Incidentally, as PayPal becomes a tighter operation, it’s less prone to letting competitors seep through its cracks and push them open. Other companies, which may be facing their own challenges, are also going back to their core operations and may be focusing less on gaining ground in PayPal’s territory.

Even though PayPal stock is rising, it’s still down 73% over the past three years. You may have missed its gains from before that, but it’s going to climb some more, and it looks like a great value stock for long-term investors.