The digital payments leader's business is maturing, but it may still be a good investment.

PayPal (PYPL 0.33%) is one of the world's largest digital payment platforms, spun out of eBay 10 years ago. If you had invested $1,000 on PayPal's first day of trading, your investment would have grown to $7,411 when PayPal reached its all-time closing high in July 2021.

But at the current price of $70, that investment would shrink to about $1,680. Over the same period, $1,000 invested in an S&P 500 index fund would grow to about $3,220. Let's look at why PayPal's stock has underperformed the market and whether it can ultimately deliver life-changing returns.

Competitive Advantage

PayPal operates a global, two-sided network connecting millions of customers and merchants in approximately 200 markets, with 434 million active accounts as of December 31, 2024. It serves nearly 90% of the Fortune 500 and over 20 million small business merchants worldwide, giving the company a strong network effect.

The fintech company aims to build upon this foundation and continues to enhance its services for small and medium-sized businesses (SMBs) through PayPal Complete Payments (PPCP). The platform simplifies SMB services through an integrated, end-to-end solution tailored to the needs of small businesses.

PPCP enables SMBs to easily access PayPal's latest online branded checkout features and new products like Fastlane. As of the end of the second quarter, approximately half of SMBs' processing and checkout volume was conducted through the PPCP platform – a significant increase since the company launched the platform last year.

PayPal has other growth avenues beyond merchant services. For example, its peer-to-peer payment service, Venmo, grew 20% in the second quarter, its highest growth rate since 2023. Meanwhile, total payment volume through Venmo increased 12%, its highest growth rate in three years. This momentum is driven by product innovation and marketing efforts aimed at repositioning Venmo from a peer-to-peer payment tool to a platform for everyday commerce. Other profitable products in this category include the Venmo debit card and Pay with Venmo.

PayPal also saw growth in the buy now, pay later (BNPL) sector, which has proven to be a popular payment method among younger consumers. BNPL saw strong quarter-over-quarter growth, with transaction volume increasing by over 20% and monthly active accounts increasing by 18% in the second quarter.

The average order value for customers who choose BNPL is over 80% higher than with standard branded checkout. PayPal attributes its success in the BNPL space to its scale, ease of use, and customer value. For merchants, PayPal's BNPL solution seamlessly integrates into the PayPal ecosystem, requiring no additional technical effort and often at a lower cost than standalone BNPL providers.

Stablecoins have become a hot topic in the United States following the recent enactment of the Genius Act, which established a federal regulatory framework for payment stablecoins.

PayPal launched PYUSD in August 2023, becoming one of the first major financial institutions to launch a dollar-backed stablecoin. PYUSD is pegged to the US dollar and fully backed by US dollar deposits, US Treasury bonds, and similar cash equivalents.

One of PYUSD's main goals is to address the high fees and slow speeds associated with cross-border remittances. It provides a stable, reliable, and cost-effective alternative to traditional systems to facilitate global economic activity.

PayPal is actively developing and testing business-to-business (B2B) use cases for PYUSD, viewing it as an attractive way to promote cryptocurrency and advance U.S. payments beyond traditional methods. Its stablecoin also offers a potential path to reducing costs, particularly in cross-border B2B scenarios. Pay with Crypto offers a 0.99% transaction fee, which the company claims can reduce transaction costs by up to 90% compared to international credit card processing.

What happened to PayPal in the past few years?

In 2018, eBay announced it would replace PayPal with smaller Dutch rival Adyen as its preferred payment platform over the next five years. The loss was a staggering one, but PayPal's rapid growth during the pandemic, fueled by a surge in online orders and peer-to-peer payments, temporarily offset the pressure.

At an investor day in early 2021, then-CEO Dan Schulman boldly declared that the company's year-end active accounts were expected to nearly double from 377 million to 750 million between 2020 and 2025, with annual revenue expected to more than double to over $50 billion and annual free cash flow to more than $10 billion from $5 billion. However, as the pandemic wore on, the growth rates of active accounts, total payment volume (TPV), and revenue slowed.

That's why it was surprising when Schulman abandoned these ambitious goals in 2022 and stepped down as CEO at the end of 2023. By the end of 2024, PayPal had only 434 million active accounts. Full-year revenue was only $31.8 billion, with free cash flow of $6.6 billion.

The slowdown is due to inflation dampening consumer spending, competition from other digital payment platforms, and the gradual loss of eBay's revenue. Its commission rate (the percentage of revenue it retains from each transaction) has also fallen annually since its separation from eBay.

This decline was exacerbated by the fact that its TPV and revenue growth became increasingly reliant on its peer-to-peer payments app Venmo and back-end software platform Braintree, both of which charge lower rates than its main platform.

However, PayPal is still expanding its core platform, adding buy now, pay later (BNPL) services, cryptocurrency trading tools, and deeper partnerships with credit card companies such as Visa and Mastercard. PayPal has also launched more services to deepen its penetration in physical stores, provided more benefits for its credit card, and launched its own PayPal USD (PYUSD 0.01%) stablecoin for cross-border transfers and high-yield savings accounts.

As PayPal expands, it streamlines expenses to boost its operating margin, projected to rise from 15.3% in 2020 to 16.7% in 2024, based on generally accepted accounting principles (GAAP). GAAP earnings per share should grow at a steady 3% compound annual growth rate over those four years.

What will happen to PayPal in the next few years?

Current CEO Alex Chris is trying to balance expansion with stricter spending, and he plans to invest a significant amount of free cash flow into large buybacks to boost earnings per share.

The company's near-term growth is expected to be driven by new tools such as PayPal Open (which integrates payments, financial services, and risk management tools into a unified platform); PayPal World (cross-compatibility with other popular international payment platforms); Pay With Venmo (which integrates with more physical and online stores); and its streamlined Fastlane checkout service. The widespread adoption of its own stablecoin and new AI features are also expected to attract more users.

Analysts expect PayPal's revenue and earnings per share to grow at a compound annual growth rate of 6% and 16%, respectively, from 2024 to 2027. So, while its high-growth days may be over, its tightening spending and share buybacks should boost its earnings per share. Based on these expectations, its stock price currently trades at just 14 times this year's earnings, making it look cheap.

How is PayPal progressing?

PayPal's growth is slow, with revenue increasing just 5% in the second quarter and active accounts growing just 2%. But in terms of profitability, the company's performance is impressive.

When PayPal hired CEO Alex Chriss in 2013, he immediately took notice of the company's transaction margins. To win big customers, the company lowered prices, especially when running unbranded payments behind the scenes.

Since Chris took over, PayPal has renegotiated some key contracts and increased the profit it makes on each transaction. In the second quarter, the company's transaction profit grew 7%, far outpacing its 5% revenue growth.

Speaking of earnings, PayPal's performance was even better. Management actively used earnings to repurchase shares, reducing the share count and boosting earnings per share (EPS). Second-quarter EPS increased 20% year-over-year, which shareholders appreciated.

However, there are more factors to consider. First, PayPal's user growth has stagnated. Active accounts grew by only 2% in the second quarter. More worryingly, transactions per active account have fallen by 4% over the past 12 months. This downward trend began in the first quarter, when transactions per account fell by 1% (after years of growth), but now appears to be recovering.

With stagnant account growth and declining transaction volumes, PayPal hasn't contributed much to investors' revenue growth. Therefore, this is something to be wary of—stocks that have outperformed the S&P 500 typically have above-average revenue growth.

PayPal is undoubtedly a leader in the fintech sector

Despite fierce competition in the fintech sector, PayPal's early-mover advantage continues to benefit it. Its total payment volume (the total amount of funds transferred through its payment platforms) reached $442 billion in the third quarter, a 9% increase from the same period last year.

Even more encouraging is the continued growth in popularity of the PayPal payment platform. The company currently has 432 million active accounts, and the average number of payment transactions per active account increased by 9% this quarter to over 61. A large number of users are using PayPal's tools, and their usage is increasing.

Over the past few years, the popular person-to-person payment app Venmo has been one of the fastest-growing sectors. Just five years ago, Venmo had approximately 52 million users; today, the number is estimated to be 88 million. PayPal, across its entire payment platform, holds a 45% share of the global online payment processing market, far exceeding the second-place Stripe's 17%.

One area management particularly hopes to see more growth is in payments checkout. "We're particularly focused on SMBs and mobile, both of which are critical to strengthening our market positioning," Chief Financial Officer Jamie Miller said during the third-quarter earnings call.

Investors will appreciate the company's profitability. Its non-GAAP operating margin in the most recent quarter was 18.8%, and earnings per share were $1.20, up 22% from the same period last year. PayPal generated $1.4 billion in free cash flow in the third quarter and ended the quarter with $16.2 billion in cash and cash equivalents.

Even if smaller competitors try to chip away at its lead, PayPal's solid financial foundation strengthens its position. With current growth in active accounts and transaction volume, PayPal remains in a strong position.

Finding reasonably priced stocks isn't easy in the current market, but PayPal's stock looks relatively cheap compared to some of its peers. Its forward price-to-earnings ratio is just 18 times, significantly lower than fintech company SoFi's 77 times and the S&P 500's 23 times.

This gives investors the opportunity to add this fintech leader to their portfolios at a discounted price. PayPal will report its fourth-quarter results on February 5th, so if you want to see its full-year financials before making a decision, you don't have to wait long.

But considering PayPal's growing customer base and profitability, this cheap stock currently looks like a worthwhile investment of $1,000. However, it's important to note that fintech stocks can be volatile in the short term, so it's important to have a long-term strategy in place before buying.