PayPal (NASDAQ: PYPL) has had a terrible year. As of Dec. 28, the stock is down 11% in 2023, a huge disappointment compared with the impressive gains of the major market indexes.
Since its spin-off from eBay in July 2015, PayPal’s best year was 2020, when the shares soared 116%. Investors want a repeat of this type of performance.
Better days might be on the horizon. As we set our sights on the future, here’s why 2024 could be this fintech stock’s best year ever.
A fresh perspective can work wonders
The first thing that could help PayPal shares in 2024 is the new chief executive officer, Alex Chriss. He took over from longtime CEO Dan Schulman. A new face could bring a fresh perspective to the business, something investors should be optimistic about.
Chriss has already hinted at his plans for PayPal. “We will become leaner, more efficient, and more effective, driving greater velocity, innovation, and impact for customers,” he said on the Q3 2023 earnings call.
Many other companies, primarily those in tech-focused industries that benefited greatly from huge pandemic-driven growth, are following a similar strategy of right-sizing operations. In PayPal’s case, the hope is that a more controlled cost structure can lead to better profitability.
That’s not to say this isn’t already a successful business from a financial perspective. PayPal is forecast to generate $4.6 billion in free cash flow in 2023. And it has $4.8 billion of net cash on the balance sheet.
Moreover, the company benefits from network effects thanks to its two-sided platform, serving consumers and merchants. And it’s riding the secular tailwind of digital payments and online shopping.
These positive traits should make Chriss’s job a bit easier. For what it’s worth, he can continue Schulman’s goal of finding ways to increase engagement from the existing user base, as opposed to spending on marketing initiatives to bring on new customers who likely won’t use the service much.
Consequently, Chriss can prove he isn’t ignoring the qualities that established the company as a leading payments platform. In 2024, it should be about relentlessly focusing the strategy and capital investments on areas of the business that already work, as opposed to pursuing initiatives that aren’t core to the mission.
More favorable economic conditions
Throughout the majority of its history as an independent business, PayPal benefited tremendously from loose monetary policy. This is clearly evident when looking at the company’s growth between 2015 and 2021, for example. And it helps explain why the stock skyrocketed during that time.
So, it’s no surprise that when inflation proved not to be transitory and the Federal Reserve embarked on an aggressive path to hike interest rates, PayPal’s business was hurt. The payments platform leans toward discretionary purchases. When consumers are directing their spending toward essential items, which is what it seems they’ve been doing in the last couple of years, there’s less money left over to go toward less important things.
Next year could reverse these trends. With inflation coming down in the past several months, the central bank could start to cut rates in 2024. And this could provide a huge boost to the economy, mainly by supporting stronger consumer confidence.
For PayPal, the necessary backdrop would be in place to see accelerated growth in payments volume and revenue. Investors would certainly cheer this outcome, supporting outsize share-price gains.
The stock’s valuation offers meaningful upside
As of this writing, PayPal shares are ridiculously cheap, trading at a forward price-to-earnings ratio of just 11.1. In the past three years, this metric has averaged a whopping 30.9. It’s accurate to say there’s a ton of pessimism surrounding this business.
Investors should prioritize stocks with attractive valuations. This reduces the risk of overpaying, which can lead to poor returns. Plus, buying at a low valuation provides a margin of safety.
Should PayPal start to post improving financial results during the course of 2024, it’s easy to believe that the valuation multiple will expand meaningfully. And this provides a powerful tailwind for shareholders.
Should you invest $1,000 in PayPal right now?
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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 eBay and recommends the following options: short December 2023 $67.50 puts on PayPal and short January 2024 $45 calls on eBay. The Motley Fool has a disclosure policy.
3 Undebatable Reasons 2024 Could Be This Stock’s Best Year Ever was originally published by The Motley Fool
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