PayPal stock is under fire, but patient investors could eventually win big.
PayPal (PYPL -1.91%) hasn't proven a profitable stock lately. But when you dig into the numbers, there's reason to believe the shares could have considerable upside over the next several years. In fact, the stock could foreseeably double in value by the end of 2025. Here's why.
PayPal could be worth $140 billion in 2025
Most people are familiar with what PayPal does. The company operates an online payment system. Through the company's app, website, or merchant integrations, anyone can safely send and receive money online, whether that's paying a friend back for dinner or purchasing a used vehicle on eBay.
PayPal generates most of its revenue by charging fees on these transactions. In return, consumers know that their money is safe. If a merchant doesn't follow through on a purchase, for instance, PayPal will provide recourse for the buyer.
It's not a surprise that most people are familiar with PayPal. Its payment platform has more than 400 million accounts -- that's bigger than the population of the U.S. In recent years, however, growth has flatlined. In fact, PayPal's user base was larger in 2022 than it is today. That's the result of increased competition and simple market saturation.
PayPal has still been able to boost revenue nearly every quarter, but the market is worried that its biggest days of growth are behind it. These concerns have sent the stock's valuation sharply lower. In 2021, the stock was valued at 15 times sales. Today, shares are priced at just 2.5 times sales.
PYPL PS Ratio data by YCharts
As recently as 2022, PayPal stock traded at nearly 5 times sales, roughly double the valuation of today. That valued the company at nearly $120 billion, $50 billion higher than today's market capitalization. Growth rates that quarter weren't terribly high -- around 10% -- but they have failed to match that level since, causing the valuation multiple to slide further. Last quarter, sales growth reached 8.7%, but the price-to-sales multiple failed to pick up much, signaling that the market is skeptical that this bump in growth is indicative of anything permanent.
If PayPal can consistently get growth rates to 10% again, there's reason to believe the valuation would pick back up to somewhere between 4 and 5 times sales. There could be even more upside to shares, given that the company recently instituted a $5 billion share repurchasing program. These buybacks would create billions in shareholder value if growth rates improve and the valuation multiple follows suit.
In combination, it wouldn't be hard to see PayPal's market cap rise to $140 billion or more, but it all relies on getting growth rates back into the double digits and then getting the market to believe that's the new normal.
Will PayPal get growth rates back to 10%?
To get growth rates back to 10% or higher, the company needs to do two things: stabilize account user numbers and increase activity among existing users. On the latter front, PayPal is already doing a terrific job. Last quarter, transactions per active account increased by 14%. This wasn't a fluke. For the full year, the growth rate was also 14%. Existing PayPal users are still very happy with the service, with many users relying on the payment platform more than ever.
The main issue for PayPal will be stabilizing its overall account numbers. Last year, its total active accounts fell by 2%. If it could get this rate to stabilize at even 0%, total revenue growth could reach double digits once again. The company knows this and has unveiled new initiatives aimed at stabilizing its user base.
Its new Fastlane feature, for example, allows users to check out online without entering any payment info. This feature is made possible due to PayPal's huge user base. If a person accesses a merchant's webpage, there's a good chance PayPal already knows who it is and can facilitate the purchase with little extra info.
Accelerating checkout times is a major metric for digital merchants. If PayPal can help merchants improve this metric, its service could see an uptick in adoption on the merchant side and, thus, perhaps, an uptick in adoption on the user side.
It wouldn't take much to get revenue growth rates back to 10%. If the company can achieve this for several quarters, expect the valuation multiple to pick up sharply. Based on the stock's 2022 price-to-sales multiple, the company could easily be valued at $140 billion or more.
Ryan Vanzo has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends PayPal. The Motley Fool recommends eBay and recommends the following options: short July 2024 $52.50 calls on eBay and short June 2024 $67.50 calls on PayPal. The Motley Fool has a disclosure policy.
