With the surge in technology stocks this year, it may be surprising that the best performing stocks are in the technology sector Nasdaq-100 last quarter’s index was not a chip maker or software company riding the wave of artificial intelligence (AI). It was PayPal (NASDAQ:PYPL).
The fintech company’s shares rose 34.5% in the quarter, marking its best quarterly performance since 2020. The company’s strong performance comes amid signs that the turnaround plan laid out by CEO Alex Chriss is starting to take hold.
Can the stock’s momentum continue?
The turnaround is increasing
When Chriss acquired PayPal, the company was experiencing solid revenue growth, but gross margin was under pressure. Over the past decade, gross margin had shrunk from 52.6% in 2014 to 39.6% in 2023 as much of the company’s growth came from lower-margin sources. This caused gross profit to decline between 2021 and 2023, despite the company’s revenue growing more than 8% in both 2022 and 2023.
In the third quarter, the company showed progress in solving this problem that has plagued it in recent years. In the quarter, transaction margins, which are comparable to gross profit, rose 8% to $3.6 billion. It was PayPal’s highest dollar transaction margin growth since 2021 and the first time in more than two years that its BrainTree business contributed to dollar transaction margin growth.
BrainTree, PayPal’s unbranded payment processing solution, has been a solid revenue source for the company, but its lower-margin operations have also been part of the problem as companies have moved more business there.
Since taking the helm of PayPal last fall, Chriss has continued to innovate and the company has introduced a number of compelling value-added solutions to drive sales for merchants.
One of PayPal’s most exciting innovations under Chriss is an AI solution called Fastlane that allows consumers to check out in one tap without having to create an account or provide credit card information to retailers. Having to create accounts and add credit card information often leads to customer frustration and uncompleted purchases, leaving a lot of money on the table. In tests with early adopters, PayPal said returning Fastlane users convert at an average rate of almost 80%, versus an industry average of around 50%.
Image source: Getty Images.
This kind of innovation helps PayPal customers make more money, so it is highly desirable. The product only became generally available to US retailers in August, so has yet to appear in the results.
The company has also introduced a number of marketing products, including smart receipts and advanced offer platforms, that allow retailers to customize offers and make product recommendations based on the types of items customers have purchased on both their own websites and the websites of other retailers. .
With this innovation, PayPal has also tried to improve prices for both branded and unbranded products based on commercial results. It cited this price-to-value approach as the key reason why BrainTree was able to contribute positively to transaction margin dollar growth.
Chriss said that while this process will take time, the company is already in discussions with its top customers about pricing and a focus on commercial outcomes. He said the company is still in its early stages, but he is encouraged by the initial actions on price value.
Is there more upside potential in the stock?
With Fastlane becoming generally available in the US in August and its price-value strategy still in its infancy, it seems like there’s a lot more potential growth in PayPal’s future. The company has introduced some great marketing and fraud protection solutions that should drive growth and boost margins.
At the same time, despite the stock’s outperformance in the third quarter, the stock is still attractively priced at current levels. PayPal shares are trading at a price of future price-earnings ratio (P/E) ratio of 16 times and a forward price-to-sales (P/S) ratio more than 2 times, based on 2025 estimates. Both metrics are well below where the shares were trading a few years ago.
PYPL PE ratio (1 year forward) data per YCharts.
With Chriss at the helm, PayPal’s turnaround is going smoothly and the future looks bright. The best part is that the shares are still cheap and the turnaround appears to be in its early stages.
As such, I would be a buyer of the stock at current levels.
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Geoffrey Seiler has positions in PayPal. The Motley Fool has positions in and recommends PayPal. The Motley Fool recommends the following options: $70 short calls in December 2024 on PayPal. The Motley Fool has a disclosure policy.