PayPal Is Down More Than 80% From Its Peak. Here's Why I Still Own It

PayPal (NASDAQ:PYPL) was one of the biggest winners in the COVID-19 era, with soaring e-commerce demand sending its stock to a peak of about $310 per share in mid-2021. Today, it trades for more than 80% below that peak, and reports of takeover talks are now dead.

I bought shares of PayPal far more recently than the pandemic-era peak, but shares are still significantly below my average cost basis. But I'm holding on to my shares, and believe PayPal represents one of the best risk-reward plays in all of value investing right now.

Image source: PayPal.

PayPal: Then and now

In a nutshell, PayPal's growth slowed dramatically as the pandemic began to wane. Not only were general e-commerce tailwinds dissipating, but the branded checkout business faced stiff competition from Apple Pay, Shop Pay, and others. Investors were simply not willing to pay high multiples for single-digit growth.

Here's where PayPal stands today. The company's active user base has been relatively flat for some time, but in the most recent quarter, PayPal's revenue grew 5%, and total payment volume increased 10% year-over-year. It's a modest level of growth, but it's still a growing business. Plus, PayPal owns Venmo, and management has been focusing on making the leading peer-to-peer payments app more profitable.

Speaking of profitability, PayPal's growth may be sluggish, but this is a wildly profitable company. It generated $1.8 billion in free cash flow in the most recent quarter, and management has been aggressively buying back shares.

Why am I still holding PayPal?

The short answer is that the risk-reward dynamics make a lot of sense. At the current price, PayPal trades for about 10 times forward earnings, and at that price, PayPal doesn't need rapid growth to be a good investment. Even a combination of modest profit growth and a rapidly shrinking share count should keep EPS rising at a healthy pace. For example, if PayPal grows its income by about 4% per year and lowers its share count through buybacks by about 8% annually, we'd see double-digit EPS growth.

Of course, there are some big risk factors. For example, if PayPal's branded checkout business continues to lose ground, it could make me reconsider. But the bottom line is that although PayPal isn't the growth stock it was in 2021, with an aggressive buyback and excellent free cash flow, it's a company worth owning.

Matt Frankel, CFP® has positions in PayPal and has the following options: long January 2027 $75 calls on PayPal, long January 2027 $95 calls on PayPal, short January 2027 $135 calls on PayPal, and short January 2027 $85 calls on PayPal. The Motley Fool has positions in and recommends PayPal. The Motley Fool recommends the following options: short December 2026 $62.50 calls on PayPal. The Motley Fool has a disclosure policy.