Shares of fintech pioneer PayPal Holdings (PYPL -1.83%) are down about 75% from their all-time high, but zooming out tells a different story. Ever since eBay spun off PayPal in 2015, the latter’s stock has more than doubled in value. By comparison, the S&P 500 is only up about 90% during this time.

In this article, I’ll explain why 2023 might be a good time for buying shares of this market beater. That said, there are some concerns with buying PayPal today.

Why buy PayPal stock?

In 2022, PayPal generated record annual revenue of $27.5 billion, which included record revenue of $7.4 billion in the fourth quarter. These numbers were up 8% and 7%, respectively, from their comparable prior-year periods.

But the stock cratered because profitability took a big step back. For example, earnings per share (EPS) in 2022 were down 41% year over year to $2.09.

Pandemic-fueled growth motivated management to optimistically chase a lot of opportunities that ultimately hurt its bottom line. But now, the team is reversing course.

Management previously found ways to save $1.3 billion in 2023 and has since found $600 million more in savings. This means profitability is expected to improve in the coming year, which should be good for the stock.

That said, even though its profitability took a step back, PayPal is still quite profitable with $5.1 billion in free cash flow (FCF) in 2022.

Also in investors’ favor, PayPal stock trades near its cheapest price ever. Its price-to-sales (P/S) ratio is about 3 — far below its historical average. And its price-to-FCF ratio is about 17, which is quite reasonable.

PYPL price to free cash flow data by YCharts.

Admittedly, it may take time for free cash flow to get back to historical levels. PayPal’s FCF margin was consistently over 20% before falling below 19% in 2022. In 2023, management is only guiding for free cash of $5 billion, which will likely drop its margin even lower.

That said, that’s still a lot of FCF for PayPal, pointing to the stability of the business. Moreover, management is giving most of it back to shareholders in the form of share repurchases. In 2022, 82% of its FCF was used to repurchase shares. And in 2023, management plans to use 75%.

Stable revenue, robust FCF, and hefty share repurchases can combine to boost shareholder value. And with it trading at a cheap valuation, that could make PayPal stock a good performer.

Why PayPal isn’t a no-brainer buy

CEO Dan Schulman has led PayPal since 2014. But he plans to retire before the end of the year, and the search for a replacement is on.

PayPal is an enormous global enterprise, facilitating nearly $1.4 trillion in gross payment volume in 2022. Finding someone able to jump in to lead this company is no small task.

Moreover, leading the company into sustainable growth won’t be easy, either. Consider that for the first quarter of 2023, management is only expecting year-over-year revenue growth of 7.5%, one of its slowest growth rates ever.

PYPL revenue (quarterly YoY growth) data by YCharts.

Answering an analyst’s question at the Morgan Stanley Technology, Media, and Telecom Conference earlier this month about the hardest task for PayPal’s next CEO, Schulman said, “The next thing to really think about is what does the ecosystem look like going forward?”

He went on to cite the company’s strengths, many of which are mentioned in this article. But he again underlined how important it is for the next CEO to have a vision that moves PayPal forward.

To combine Schulman’s thoughts with my own, PayPal has been a great business, and the stock is cheap. But to be a great investment from here, the company needs to grow, increase in relevance, and strengthen its competitive advantages. The new CEO, therefore, will need to have an accurate vision for the future.

As mentioned earlier, there’s a lot to like about a PayPal investment. But for investors looking at its stock today, slowing growth and leadership changes place legitimate question marks on the business. Personally, I believe it’s a stock to buy, and it’s one that I continue to hold in my own portfolio. But it’s far from a no-brainer today.

Jon Quast has positions in PayPal. The Motley Fool has positions in and recommends PayPal. The Motley Fool recommends eBay and recommends the following options: short April 2023 $52.50 calls on eBay and short April 2023 $70 puts on PayPal. The Motley Fool has a disclosure policy.

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