PayPal (PYPL -5.21%) is benefiting from renewed investor sentiment. Shares have jumped 41% since early July last year. Maybe the market has become optimistic that lower interest rates can provide a boost to spending activity, propelling PayPal in the process.

Nonetheless, this fintech stock still trades 73% off its peak price from July 2021. This might make PayPal a buy-the-dip candidate for your portfolio in 2025.

Before you make a purchase decision, though, it's important to understand the company's secret weapon.

PayPal's key competitive strength

Started more than 25 years ago, PayPal now operates a leading digital payments platform that serves both merchants and consumers. The business has a strong presence when it comes to online shopping. As of Sept. 30, it had 432 million users.

As a two-sided ecosystem, PayPal's key competitive strength, or its economic moat, is that it benefits from network effects. Individuals want to sign up for a PayPal account because it's so widely accepted. And merchants want to plug into the PayPal network to gain access to a large customer base, with the intention of encountering revenue-producing opportunities.

PayPal's competitive position highlights just how difficult it would be for a newcomer to enter the industry. Not only would this hypothetical start-up need to figure out a way to sign up consumers (with these people not having anywhere to shop), but it would have to bring on merchant accounts (without these businesses having any potential customers). That seems like an impossible task.

That's not to say that PayPal doesn't need to worry about competition. There are formidable rivals all around, like Apple Pay, Block's Cash App and Square, and Adyen. But PayPal has carved out a lucrative position.

Financial success

The presence of network effects has undoubtedly helped PayPal be successful over time. And this clearly shows in the company's financial performance. You might not be able to tell by looking at the stock's performance in recent years. But this is a solid business, to say the least.

During the three-month period that ended Sept. 30, 2024, PayPal handled a whopping $423 billion in total payment volume. That figure was up 9% year over year and 136% higher than in the third quarter (Q3) of 2019. What's more, revenue in the past five years has climbed at a 12.4% annualized clip. PayPal is clearly still growing nicely.

The company is also highly profitable, putting up an adjusted operating margin of 18.8% in Q3. That propels strong free-cash-flow generation, which management has used to aggressively repurchase shares.

As of Sept. 30, PayPal carried $12.4 billion of long-term debt. On the surface, this might scare conservative investors away. However, consider the fact that the debt burden is more than offset by $16.2 billion in cash, cash equivalents, and investments. The company's balance sheet is clean, which minimizes risk.

Not a steal anymore

After the stock's 41% rise in the past six months, it's no longer a screaming bargain for prospective investors. Shares currently trade at a price-to-earnings (P/E) ratio of 20. That's a 40% premium to the valuation from last summer, as market sentiment has improved considerably.

But just because a stock has gone up by a lot in recent times doesn't mean it's not worthy of investment consideration. The overall S&P 500 trades at a P/E multiple of 24.7. And historically, PayPal shares have sold for an average P/E ratio of 44.8.

So, the valuation today still presents a compelling proposition, especially when you know about the presence of network effects. I think investors would be wise to consider starting a small position in the digital payments pioneer.