Shares of financial-technology (fintech) company PayPal Holdings(NASDAQ: PYPL) jumped 13.4% during July, according to data provided by S&P Global Market Intelligence. The stock went nowhere for most of last month. And in August, it's already giving back July gains. But for a brief moment, PayPal stock was soaring on the heels of its latest quarterly financial report.
On July 30, PayPal reported its financial results for the second quarter of 2024, beating estimates on the top and bottom lines. At the top, the company generated revenue of $7.9 billion, which was up 8% year over year. And at the bottom, it had earnings per share (EPS) of $1.08, which was up 17%.
PayPal continues to see growth in both active accounts and transactions per user. Moreover, the company's enterprise products are also growing, with expanded partnerships announced with DoorDash and Meta Platforms.
In short, PayPal latest quarter showed that it is still a growing business.
It's more than just growth
One thing that more studious investors really honed in on was PayPal's Q2 transaction margin. For fintech companies, this is similar to a gross profit margin metric. Over the last five years, PayPal's revenue has continued to climb. But its transaction margin has dropped, causing its gross profit to stagnate in recent years.
PYPL Revenue (TTM) data by YCharts
This was largely due to PayPal's unbranded checkout product Braintree. It was gaining business, but at lower and lower margins. In Q2, CEO Alex Chriss said, "Braintree is now meaningfully contributing to transaction margin dollar growth for the first time in over two years." If this can continue, then the business is truly on solid footing for the long term.
What this means for investors
For perspective, trading at just 2 times its sales and about 10 times its free cash flow, PayPal stock has never been cheaper during its near decade on the stock market. Investors have had little faith in the business, and the valuation reflects that.
PYPL Price to Free Cash Flow data by YCharts
Should investors buy PayPal stock at a cheap valuation now that important metrics are improving? I'll answer that question like this: Management has been aggressively repurchasing shares, which can be a sign of confidence in the business. PayPal management just said that it's going to increase the pace of repurchases in light of its Q2 report.
It's not a sure-fire way to predict which way PayPal stock will go. However, management has repurchased $5 billion in stock in just the past year and wants to pick up the pace even more at these prices. It could be false confidence. But it's a way of saying that management believes the stock is undervalued and wants to quickly take advantage before it goes back up.
Again, this doesn't guarantee that better days are ahead for PayPal stock. But it does communicate confidence from management, which is something.
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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Jon Quast has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends DoorDash, Meta Platforms, and PayPal. The Motley Fool recommends the following options: short September 2024 $62.50 calls on PayPal. The Motley Fool has a disclosure policy.
