The decline in users won’t stop its double-digit growth

After the technology sector in the United States drove indexes like the S&P 500 and NASDAQ to new all-time highs, investors may realize that not all stocks have enjoyed the same run as names like Nvidia Co. NASDAQ:NVDA and other semiconductor readers.

Far from being in the spotlight, other stocks have yet to catch up with the technology pack, especially now that the US economic cycle may be bottoming out. PayPal Holdings Inc. NASDAQ:PYPL is one such stock, which has underperformed SPDR fund for the selected technology sector NYSEARCA: XLK by as much as 53% in the last 12 months.

PayPal shares even underperformed another sector to which they are highly exposed, consumer discretionary. Falling behind SPDR fund for selected consumer discretionary sectors NYSEARCA: XLY by 36% over the year, while being correlated by 63%, gives investors the opportunity to consider an investment in PayPal.

It’s not all bad news

After recording its first decline in net users, going from 435 million in 2023 to 431 million in 2023, PayPal shares recorded a negative performance of 18%. While justified, it may actually not be as bad as people think it is.

While the company suffered its first drop in user base, PayPal still saw an annual increase in payment volume. From 2022 to 2023, payment volumes (in dollar terms) increased from $1.3 trillion to $1.5 trillion, meaning the quality of users attached to PayPal has increased despite there being fewer users overall.

More specifically, annual transactions per account increased from 51 in 2022 to 58 in 2023. The company has not seen a decline in transactions in ten years, allaying concerns over declining total users.

Markets tend to focus a lot on the PayPal name, forgetting that PayPal also owns the Venmo platform. Looking into Venmo, things become a little clearer for those worried bulls. Venmo’s revenue saw healthy annual growth of about 10%, reaching $935 million.

The annual value of users and transactions also increased over the year, cushioning the blow dealt specifically to the PayPal platform. While speculative, Venmo’s valuation is expected to be $38 billion, nearly 50% of PayPal’s market capitalization.

The fact that Venmo could account for nearly half of PayPal’s value raises the question of whether the stock is selling at a discount, which wouldn’t be far from the truth.

It’s still PayPal, just cheaper

Compared to the Internet Software sector, which trades at an average forward P/E multiple of 34x, PayPal offers a 66% discount to its 11.4x valuation.

The company is undoubtedly one of the strongest brands in the industry, with competitors such as Paycom Software Inc. NYSE: PAYC AND Block Inc. NYSE: sqm have a real presence but not the track record of PayPal.

The answer everyone is looking for, especially to justify the bullish thesis of a stock that has fallen 80% from its all-time high of $310 per share, is whether it still has a competitive advantage.

Many other payment services are on the market, including Zelle and The Apple company. NASDAQ:AAPL with ApplePay. However, only PayPal offers a true third-party presence, guaranteeing customers their money if the underlying transaction is an error or even a scam.

Zelle also has a warning message on mobile banking platforms like Bank of America Co. NYSE:BAC. The message is something like “Treat Zelle like cash,” meaning once it’s sent, it’s as good as gone.

This extra layer of protection bridges typical banking transactions and the supposed “decentralized” functionality offered by cryptocurrencies without all the legal hassles.

Is it still a purchase?

Institutions think so, as the stock has seen net institutional inflows of $24 billion over the past 12 months. As the U.S. economic cycle bottoms out, as measured by index reports like the ISM Manufacturing PMI, merchant accounts on PayPal will likely need to make more transactions.

A stock price target of $70.5 might be on the more conservative end of the spectrum, requiring only an 11% upside from today’s price.

Earnings per share (EPS) are expected to grow 12% for PayPal over the next 12 months, higher than Apple’s 8.5% and even Bank of America’s 8.3%. Since stock values ​​are generally driven by their earnings, PayPal’s superior growth with double-digit discounts sets aside the brand’s hiccups in total user decline.

All in all, the stock’s price targets still have double-digit upside.

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