PayPal May Be Undervalued, but Is This Other Fintech a Better Buy? | The Motley Fool (2024)

PayPal Holdings (PYPL -2.93%) has, over the years, grown to become the iconic fintech company. Founded in 1998, PayPal now serves more than 429 million consumers and merchants. At the end of its first quarter, it had processed nearly $1.3 trillion in payments over the previous 12 months.

But just because it's big and well-known doesn't mean its stock can't get slammed over the past year like so many other tech stocks in this bear market. PayPal's stock price is down nearly 77% from its 52-week high. With the stock now trading at an all-time low of 25 times earnings, is PayPal undervalued? Or is this a sign that investors should look for other fintech opportunities?

What's going on with PayPal?

While the PayPal platform is the face of the company, it also owns peer-to-peer payment platform Venmo and more niche solutions such as Honey (the add-in that automatically searches for coupons on various e-commerce sites). Because the company was so well known for facilitating digital payments, its stock experienced a lot of hype during the pandemic. But that investor enthusiasm has since vanished.

In Q1, PayPal's revenue increased just 8% year over year (admittedly hampered by tough comparisons to a very strong Q1 2021), while its earnings per share (EPS) decreased 53%. For the rest of 2022, PayPal expects revenue to grow 12% at the midpoint, with EPS poised to fall around 50%.

The growth slowdown can also be attributed to a drop in profitability related to rising transaction expenses and losses. While the rest of PayPal's operating expenses rose relatively in line with revenue, its transaction expenses and transaction and credit losses rose 24% and 35%, respectively. Management attributes most of this decline to the ending of a partnership with eBay as well as currency effects. Countering the slowdown has been the ongoing, long-term monetization of Venmo.

PayPal is still seeing use expansion: Average annual transactions per active account rose to 47, up 11% year over year. Investors can expect consistent growth as management pivots its strategy to monetize and increase usage among its active users. But some wonder if the days of impressive quarters with massive growth may be behind PayPal. If it can increase its profitability and grow its earnings, PayPal could be a steal today.

If you're looking for fast-growing fintech companies, you may want to check out this next one.

dLocal is seeing strong growth in emerging markets

E-commerce companies want to sell to everyone, including consumers in emerging markets. However, the payment infrastructure isn't well established in these locations, or if it is, it is fragmented with different protocols. Enter dLocal (DLO 5.99%) which offers two solutions that link buyers and sellers. Its Payin product allows local payment methods to be used online, while its Payout product allows businesses to pay local sellers directly to their bank account in their currency.

dLocal operates in 37 countries as of Q1, with the Ivory Coast and Rwanda added during the quarter. These locations aren't huge markets by themselves, but when added together, they represent a significant market opportunity. Because it would be difficult for retailers to set up this payment infrastructure in every country individually, it makes more sense to use dLocal's country-agnostic solution, which is already developed and adding more markets quarterly.

dLocal offers a cost-effective service for e-commerce giants and one that is not easily replicated. Among dLocal's customers are giants like Nike, Amazon, Uber, and Booking.com. These customers give dLocal serious credibility, showing potential customers that dLocal is the real deal.

The growth dLocal has experienced is astounding. In Q1, revenue rose 117% year over year to $87 million, with total payment volume rising 127% year over year to $2.1 billion. Additionally, customers spent $190 for every $100 spent last year, showing their willingness to stick with dLocal's platform. The company is also highly profitable, with its net profit margin nearly double that of PayPal.

PYPL Profit Margin data by YCharts.

For the rest of the year, management doesn't expect its retention rate to remain at 190%, but it believes 150% or more is reasonable and still quite impressive. This expansion should continue to drive both growth and profits, which will eventually make the stock cheaper from a price-to-earnings (P/E) standpoint.

dLocal trades for a hefty 110 times earnings. That's not cheap. However, with the business growing as fast as it is, its valuation should come down significantly after its next earnings report provides the updated data.

Analyzing the two companies at the moment isn't quite an apples-to-apples comparison, since dLocal has a long way to go before fully penetrating its market while PayPal is much farther along in this regard and beginning to focus more on better monetizing its existing users.

But from a growth stock investment perspective, I think dLocal is the clear-cut winner. It will likely also be the more volatile of the two stocks, given its richer valuation. If investors can handle that volatility and are in it for the long-haul, dLocal is a stock that investors can place in their portfolio and be impressed with its growth five years later.