Although market downturns can be anxiety-inducing, they are perfectly normal and, in fact, always create opportunities for astute investors to scoop up shares of great companies from the discount bin. The recent dip that especially affected the tech-heavy Nasdaq Composite is no different.

Though the index has rebounded somewhat, there remain attractive beaten-down stocks to buy, including PayPal (PYPL). The payments processor is down about 20% this year, a poor performance that traces to a disappointing quarterly update. None of that should scare investors away, though; quite the contrary. Read on to find out more.

Changes are afoot at PayPal
The past five years have been a roller coaster for PayPal and its shareholders. The company turned in some of the best quarters in its history in the early days of the pandemic as retail activity shifted in ways that helped its business. PayPal’s performance then slowed considerably once government-imposed lockdown orders expired.

In late 2023, PayPal hired a new chief executive officer, Alex Chriss, who wasted no time making changes. For instance, PayPal has been ramping up its new advertising platform.

The move makes sense: Millions of customers and businesses trust PayPal. An ad platform could increase the value of its ecosystem for both sides of the commerce equation. Companies will increase sales and conversion, while consumers will see more personalized recommendations for products and services they enjoy — everyone wins, including PayPal. The fintech leader’s other changes include initiatives such as FastLane, which aims to reduce the time spent at checkout (a one-click checkout option).

There is more where that came from. PayPal plans to use artificial intelligence (AI) to make more changes. As Chriss said during the company’s fourth-quarter earnings conference call: “This year, we are prioritizing the use of AI to improve the customer experience and drive efficiency and effectiveness within PayPal.” Further, PayPal is betting on profitable growth. In the fourth quarter, the company’s Braintree unit (a payment processing platform) delivered disappointing growth, leading to a dip in its share price.

However, as management noted, it intentionally abandoned unprofitable volume within this segment. That means lower revenue growth but higher margins in the long run. PayPal’s changes and direction during the past year-and-a-half since Chriss took charge of the company look rather promising.

Looking at PayPal’s long-term prospects
PayPal’s financial results don’t look as impressive as they once did. In the fourth quarter, the company’s revenue increased by 4% year over year to $8.4 billion.

PayPal’s top-line growth has declined significantly over the years. But that’s normal as a company matures. Meanwhile, there are excellent reasons to be bullish on the company’s future. Let’s consider three of them.

First, PayPal is a pioneer in the fintech industry. The company boasts a powerful brand name that inspires confidence among consumers and businesses. PayPal’s peer-to-peer payment app, Venmo, has practically become a verb (especially among younger generations) used in everyday language.

PayPal’s reputation grants it a strong competitive advantage. It isn’t the only source of the company’s moat, which brings us to our second point. PayPal benefits from the network effect: The more consumers use its platform, the more attractive it becomes to merchants — and the more merchants in the network, the more consumers want to use PayPal. PayPal’s network effect should work in tandem with its name and reputation to help it to remain a fintech leader for a long time.

Third, PayPal has huge opportunities as fintech grows, thanks to tailwinds such as the increased shift to online commerce. Greater adoption of digital payments, even for offline payments, represents another avenue for growth. PayPal estimates a total addressable market of $125 billion in online payment revenue, $200 billion in offline payments, and $800 billion in ads and credit revenue. It has barely scratched the surface here. PayPal won’t capture these entire markets by itself. However, making solid headway in these segments should allow it to deliver consistently strong results, especially in light of its recent and continuing business changes and solid moat.

That’s why the company’s recent dip represents an opportunity. Although the stock might not rebound this year, it could reward patient investors in the future.

— Prosper Junior Bakiny

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Source: The Motley Fool