PayPal's stock is having its best year since 2020, and this is a big reason why

By Emily Bary

When PayPal CEO Alex Chriss took over a year ago, investors questioned whether the company had a future. Now he says product innovations have helped change the conversation.

After three down years for PayPal Holdings Inc. shares, they're solidly in positive territory for 2024, as the payment-technology company's fresh start has resonated on Wall Street.

Chief Executive Alex Chriss took over the top spot at PayPal (PYPL) a year ago, replacing Dan Schulman who had led the company since the time of its 2015 separation from eBay Inc. (EBAY). There were plenty of highlights under Schulman's regime, and the company near its pandemic-era peak was briefly worth more than Mastercard Inc. (MA). But PayPal struggled to recapture that glory once the economy reopened and it lost the COVID-driven e-commerce bump.

So far, investors seem to like how Chriss has reoriented the company around profitable growth, made product innovation a priority and struck compelling partnerships. "He's not making any mistakes," Mizuho analyst Dan Dolev told MarketWatch.

In a note to clients earlier this month, Baird's Colin Sebastian noted "gradually ramping investor interest in PayPal, as last year's management changes are leading to faster product development, including several platform enhancements that are close to seeing the light of day."

Read: Why Visa's antitrust battle could be so worrying to Wall Street

Chriss said that when he assumed the CEO role at PayPal, investors genuinely questioned whether the company had a future after a period of lagging innovation and slowing growth. "I wanted to come in and show that PayPal had not reached its potential yet, and we were just scratching the surface of what's possible," he said in an interview.

He set out to turn PayPal into an "innovation machine" and says he got a tangible sign of that progress recently when someone at an investor conference said they couldn't keep up with the announcements that PayPal has been putting out.

Earlier this year, the company announced a new offering called Fastlane meant to speed up the process of guest checkout. The company also announced tools for advertising and Venmo monetization at the same January event that PayPal said was broadly focused on "innovation."

At the time, there was a sell-the-news reaction to the event, with some questioning whether the innovations were disruptive enough, especially in a competitive market for online checkout and with a lot of hype leading up to the big reveal. But investors seem to be coming around.

Fastlane "is looking like a big win," according to Dolev, who estimates it could add 5 to 10 percentage points to the company's gross-profit growth. Back when PayPal held the innovation event, he had recently downgraded PayPal shares, but now he's back in the bull camp.

PayPal is known for making partnerships, which were key to the company's ability to survive on its own after the eBay split. When PayPal first became a standalone public company, some on Wall Street thought the company would get trounced by the likes of Mastercard and Visa Inc. (V). PayPal ended up seeking out partnerships with those companies that actually encouraged customers to use their cards for funding transactions instead of methods that would have been cheaper for PayPal.

Now, partnerships are back en vogue, and PayPal recently struck new arrangements with Amazon.com Inc. (AMZN), Shopify Inc. (SHOP) and Adyen N.V. (NL:ADYEN).

The Adyen one, which will see the Dutch payments company use PayPal's Fastlane for guest checkout in the U.S., especially stands out to Dolev because the companies directly compete in other parts of their businesses. The fact that Adyen chose a product from a competitor is "a big positive," he said.

The need for faster guest checkout is important because consumers may opt not to move forward with transactions if it takes too long to input information. Chriss said PayPal is able to speed up the guest-checkout process because the company has a two-sided ecosystem, meaning relationships with both consumers and merchants.

He thinks PayPal has succeeded already in changing the narrative about a lot of areas of its business. The thing people might still misunderstand about the business is "the breadth and the power" of that two-sided ecosystem at a large scale.

"The misunderstood part is when we start to really leverage these network effects, we're able to innovate in a totally different way," he said.

Fastlane is one part of that, but PayPal also has opportunities in advertising. "The current ad model that's out there now is isn't all that personalized, and there's a lot of money being spent in really top-of-funnel access to consumers without clear ROI," or returns on investment, Chriss added. Because PayPal has access to checkout data, it can enable merchants to create customized rewards or offers for "the customers that they want the most."

There are still challenges ahead of PayPal, and shares, despite the recent momentum, are down 74% from their all-time high hit in 2021. One issue that still worries investors is the prevalence of Apple Inc.'s (AAPL) Apple Pay, which makes it quick for iPhone users to pay on unfamiliar sites.

See also: Apple's business is way more dependent on the iPhone than you might think

But while PayPal may not be gaining market share in branded checkout, it's "definitely not losing share" either, according to Dolev. The company is growing in line with the e-commerce market, which to him shows that Chriss has stabilized the business.

PayPal shares are up 30% so far this year and on track for their first year of positive performance since a 117% rally in 2020. Shares are also up 36% in the past year, spanning the course of Chriss's tenure, and they've edged the S&P 500's SPX 34% gain over that time.

-Emily Bary

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09-27-24 0600ET

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