Can PayPal Double in 5 Years? Here's What It Would Take.
PayPal (NASDAQ: PYPL) has been one of the worst-performing stocks of the past few years. It's down by about 80% from its 2021 all-time high. To be sure, there are some good reasons. User growth has stagnated, a brand-new management team just took over, and there's an unclear plan when it comes to future growth.
On the other hand, PayPal looks like a remarkably cheap stock these days, and it could certainly deliver a 100% or higher return for investors over the next five years if things go well.
What would it take for PayPal to double?
Many different things could happen with PayPal over the next five years, and it's impossible to name them all here. It's entirely possible that management will introduce a new and successful product, or for the company to leverage AI in some way that dramatically improves something about its platform, just to name a few examples.
It's also worth noting that many factors that will influence PayPal stock (or any other stock, for that matter) have nothing to do with the fintech giant's business. Interest rates are one example, as higher rates tend to create valuation compression in the stock market, especially in stocks that aren't growing rapidly.
Here are some factors that could potentially lead PayPal's stock price to double.
Management reinvigorates user growth
I won't sugar-coat it. PayPal's user growth has been nonexistent lately. In fact, over the past year, the number of active accounts has declined by 1%. It's currently sitting at 427 million.
PayPal not only has a new CEO, but essentially an entirely new leadership team that is just getting started. If they can successfully start building the user base once again, it could give the stock new life.
PayPal currently trades for just over 14 times forward earnings estimates, and sluggish growth is the main reason why. In early 2022, even after PayPal had lost half of its value from its peak, the stock had a forward price-to-earnings (P/E) ratio of about 45. I'm not saying it will be this highly valued again anytime soon, but if the user base starts growing again and overall revenue growth accelerates, we could certainly see significant multiple expansion.
Engagement continues to rise
One thing PayPal has done a great job with, and continues to do a great job with, is user engagement. That is, the average active PayPal user completes more transactions through the platform over time.
While PayPal's user base has stagnated, the average active account now completes 60 transactions through the platform annually -- 13% more than the average user completed a year ago.
If management can continue to boost engagement while also growing the user base, it would cause top-line revenue growth to accelerate, which would almost certainly be a positive catalyst for the stock.
Payment volume doubles
There are three factors that contribute to PayPal's total payment volume:
How many people use the platform.
How often those people use the platform.
How much the goods and services people pay for cost.
We've already discussed user growth and engagement, and it's also worth mentioning that PayPal's volume should naturally increase in-line with inflation over time. As a simplified example, if a user spends $100 on groceries through their PayPal account and the inflation rate is 5%, that same user should spend $105 on their grocery order next year.
If, through a combination of these three factors, PayPal is able to roughly double its payment volume over the next five years, the stock could potentially double (or more).
Management continues to aggressively buy back stock
PayPal is currently generating about $5 billion in free cash flow on an annualized basis, and management is essentially using all of it to buy back stock. This is a sign that management not only thinks the stock is cheap, but that it can drive earnings-per-share (EPS) growth going forward, as the company's profits will be divided among a smaller group of investors.
Over the past three years, PayPal has reduced its outstanding share count by about 11% through buybacks, even after the dilutive effects of stock-based compensation. If it can continue to buy back shares at the current pace, its share count could decline by another 15% or more within five years. Even without much business growth, that would significantly boost EPS.
Doubling wouldn't be a big stretch
Just to put things into perspective, PayPal could double from its current share price and still be about 60% below its 2021 all-time high. And while a double over five years would be greater than the long-term average return of the S&P 500, it wouldn't exactly be an earth-shattering performance.
In fact, a 100% total return over five years would require about a 15% annualized rate of return, which would likely require strong, but not phenomenal, business performance. So, if some of the things I discussed here actually happen, it's entirely possible that PayPal could double investors' money (or much more) over the next five years.
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Matt Frankel has positions in PayPal. The Motley Fool has positions in and recommends PayPal. The Motley Fool recommends the following options: short June 2024 $67.50 calls on PayPal. The Motley Fool has a disclosure policy.
