After a difficult start to the year that saw shares drop 6% in the first half of 2024, PayPal (PYPL 0.40%) is on its way up, winning over investors in remarkable fashion. The fintech stock has soared 42% in the last six months, which puts its year-to-date gain at 39% (as of Dec. 18), well ahead of the broader S&P 500.
However, shares are still trading a worrying 72% off their peak price. Long-term investors might still consider initiating a position in PayPal. Is it a smart stock to buy for 2025 and beyond?
Improving market sentiment
The positive momentum for PayPal shares started when the business reported financial results for the second quarter of 2024 (ended June 30). During that three-month period, the company posted double-digit growth in total payment volume (TPV), with an expanding operating margin driven by expense controls. What’s more, management raised full-year guidance for adjusted profit.
But then the company reported weaker-than-expected revenue for the third quarter, with fourth-quarter guidance that was below market forecasts. The stock immediately dipped 7% following the news on Oct. 29.
The investment community appears to have shrugged off what were mixed results from the digital payments giant in the past few months, by still propelling shares higher. It’s worth pointing out just how vital improving market sentiment has been for PayPal.
The stock has soared 42% in the past six months. But this was driven primarily by a price-to-earnings (P/E) ratio that expanded by 35% during that same period of time. Whether it’s a combination of PayPal’s solid financial numbers, improving macro conditions, and/or the possibility of easing regulations, the market has become more optimistic about the company.
PayPal’s resilience
Investors who are able to look past the stock’s performance over the past few years won’t struggle to realize that PayPal’s business is actually on very solid footing. The company continues to show strength in key metrics, indicating the health of its operations.
TPV increased 9% year over year to $422.6 billion in Q3. That figure was 136% higher than in pre-pandemic Q3 2019. PayPal certainly benefited from the popularity of online shopping during the health crisis, but it has been able to build on top of these gains.
CEO Alex Chriss has been hyper-focused on creating a more efficient organization. Operating expenses increased by 3% in Q3, well below the 6% gain of net revenue, thanks to cost management efforts that haven’t prevented PayPal from still investing in marketing and product development.
The results are showing up in PayPal’s profitability. After raking in $4.2 billion in free cash flow in 2023, executives predict $6 billion will be generated this year. This remains a financially sound enterprise, with $16.2 billion in cash, cash equivalents, and investments on the balance sheet, compared to $12.4 billion in debt.
Think long term
After that massive rise in the stock price in just six months, investors are right to wonder if it’s too late to hop on the PayPal bandwagon. But I urge you to always think long term, with a focus on the next five years.
As of this writing, shares trade at a P/E ratio of 20.5. That’s not only less than half their average historical multiple of nearly 45, it’s a discount to the broader S&P 500. While it’s not as attractive as it was earlier in the year, I still believe the current valuation is reasonable.
The potential for steady revenue and earnings growth, coupled with the possibility that the valuation will expand, mean that shareholders who buy PayPal stock have a chance to be rewarded in 2025 and beyond.
Neil Patel and his clients have 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 December 2024 $70 calls on PayPal. The Motley Fool has a disclosure policy.