In 2023, PayPal Holdings (NASDAQ:PYPL) stock appears poised to conclude with a third consecutive year of losses, following a substantial 62% decline in 2022, marking its most challenging performance since its 2015 separation from eBay (NASDAQ:EBAY). The preceding year, 2021, was similarly unfavorable, witnessing nearly a fifth of PayPal’s market capitalization vanish. Although 2023 saw a relatively modest downturn and a subsequent rebound from multi-year lows, investors are left pondering whether the ‘law of averages’ could play a role in propelling PYPL to new heights.
Various market principles, including moving averages and dollar-cost averaging, influence trading decisions. Another facet of the ‘law of averages’ is observed in sectors like sports and finance, where betting on underperforming entities anticipates a statistical reversion toward the mean, resulting in improved performance.
The landscape of U.S. stock markets in 2023 reflected this trend, with notable reversals in the fortunes of companies like Tesla (NASDAQ:TSLA), Nvidia (NASDAQ:NVDA), and Meta Platforms (NASDAQ:META). Surprisingly, PayPal stands as an exception, ranking among the top 100 S&P 500 losers in 2023. Can the ‘law of averages’ come into play in 2024, finally ushering in a rebound for PYPL? This article explores this possibility, commencing with an analysis of the factors contributing to the fintech giant’s current market sentiment.
Understanding the Decline
The decline in PayPal stock is not arbitrary but stems from several challenges the company faces:
Slowing E-commerce Sales: The initial surge in digital payment companies during the COVID-19 lockdowns did not sustain, leading to a decline in PayPal’s market share in total U.S. sales.
Slowing Revenue Growth: PayPal’s revenue growth has dwindled to single digits, a significant drop from the robust double-digit growth observed between 2020 and 2021. Additionally, its active user count has decreased.
Margin Pressure: Intensified competition has led to pressure on PayPal’s take rate, particularly affecting its branded business and resulting in a compression of operating margins.
Valuation Multiple Compression: Pessimism surrounding PayPal’s shares has contributed to a contraction of its valuation multiples.
PYPL Stock 2024 Forecast: A Glimpse of Optimism
Despite the challenges, PayPal’s 2024 forecast presents a positive outlook. The company has undergone leadership changes, introducing a new CEO and CFO committed to revitalizing its fortunes. With a strong network effect, PayPal aims to expand its target market, introducing initiatives like the Venmo Teen account and expanding its buy-now-pay-later (BNPL) business through strategic partnerships.
During the Q3 2023 earnings call, CEO Alex Criss emphasized a focus on high-quality customer growth and profitable revenue growth, signaling a shift in the company’s business strategy. While acknowledging a loss of accounts, characterized as “low quality customers,” PayPal remains optimistic about its ability to manage customer churn and streamline its cost structure for enhanced operating leverage.
While the ‘law of averages’ doesn’t always favor low-quality stocks, PYPL’s 2024 outlook seems promising as the company refines its strategy under new leadership. Compelling valuations, with a forward price-to-earnings-to-growth multiple below 1, add to the attractiveness of PayPal stock. In summary, there’s optimism for a rebound in PYPL, driven by increasing earnings and potential expansion of its valuation multiples.
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