Anticipating a Change for the Better at PayPal? Recent Quarters Indicate an Upsurging Trend Has Officially Gained Traction.
In the realm of long-term investing, the common advice is, "Focus on the business, not the stock price." This is particularly beneficial in the stock market, where publicly traded companies are required to disclose financial information, making it straightforward to observe the business.
However, investors ought to be cautious. A company might post impressive figures in a particular quarter, but it could be a fleeting success. On the other hand, establishing a positive trend in a business requires multiple quarters. Consequently, patience is crucial when observing the business.
For those monitoring the business with fintech innovator PayPal Holdings (PYPL -1.45%), its recent performance indicates a developing trend that's significant for shareholders.
A momentum-building trend
PayPal's stock has plummeted approximately 75% from its 2021 peak. However, a surprising fact for the uninitiated is that since its initial public offering in 2015, PayPal has never reported a year-on-year decrease in revenue. Although revenue growth has slowed, it has persistently increased throughout its tenure as a publicly traded company.
Although this trend is significant, I'm not referring to it at the moment. However, it's worth noting that PayPal continues to grow, which is positive.
PayPal's issue lies with its earnings. Although revenue has escalated, the same cannot be said for profits. The graph below shows the company's revenue, gross profit, and free cash flow from January 2020 to December 2023. As evident, revenue continues to climb while gross profit and free cash flow begin to decrease.
Notable profit decline is a major reason for the stock's recent downturn. But the emerging business trend I'm about to discuss is vital.
I included PayPal's gross profit in the graph for convenience. However, in the fintech world, companies often use a similar metric called transaction margin. PayPal reported its third-quarter results for 2024 on Oct. 29. In Q3, its transaction margin reached 46.6%.
This transaction margin represents two consecutive quarters of improvement for PayPal - a fair description of a trend. Moreover, 46.6% is PayPal's widest transaction margin since the first quarter of 2023.
It's worth noting that PayPal has improved its transaction margin for two consecutive quarters. However, the transaction margin dollars metric has improved for three consecutive quarters, subtly different from gross profit and gross margin.
After years of observing revenue growth without any notable increase in profits, PayPal might be on the brink of enhancing profitability.
Anticipating a PayPal resurgence?
While short-term stock movements can be randomly influenced by various factors, long-term movements are typically driven by more identifiable forces. Revenue growth is indeed important. But investors cannot overlook the role higher profits play in driving higher stock returns.
It's worth noting that PayPal's leadership team has undergone significant changes in the past year. It appears this new team has implemented changes to the business that are contributing to the improvement in profits once again. This is an important trend for investors to closely monitor.
As mentioned, PayPal's stock has plummeted approximately 75% from its peak, and many investors are certainly hoping for a resurgence. If PayPal's profitability continues to improve while revenue continues to rise, a resurgence in the stock price is likely to ensue.
It's essential for investors to continue monitoring PayPal's business because the positive trend is new. However, recent financial results provide shareholders a compelling reason for optimism for 2025 and beyond.
Investors should consider the ongoing improvement in PayPal's transaction margin, which reached 46.6% in its third quarter of 2024, representing two consecutive quarters of increase and the widest margin since 2023. This trend in transaction margin might indicate PayPal's potential to enhance its profitability, which could positively impact its stock price in the future.
However, despite the encouraging financial results, it's crucial for investors to remain vigilant and continuously monitor PayPal's business performance, as the positive trend is still in its early stages.
