What happened
Shares of fintech giant PayPal Holdings (PYPL 0.64%) were down 20% in November according to data provided by S&P Global Market Intelligence. The third-quarter earnings report showed decelerating growth rates, and general market volatility worked against the digital payments company.
So what
PayPal is the original peer-to-peer payments network, and between its PayPal payments, Venmo payments, and merchant business, it controls a large digital payments system that makes money from several streams.
Image source: Getty Images.
The company posted fantastic results during the pandemic when digital payments were essential, and that's beginning to slow down. Revenue increased 13% in the third quarter, down from 25% last year and 17% in the second quarter. The 2020 third quarter was the strongest revenue growth in PayPal's history, so 13% piled on top of that isn't all that bad. Management lowered its full-year expected total payment volume and revenue growth estimates after the third-quarter report.
To make matters worse, PayPal stock got a downgrade from investment bank Bernstein based on its belief that the company will face stronger competition in the payments space from e-commerce companies like Amazon and Shopify. These companies have greater clout with payments companies due to their volume, and they're also creating their own payments solutions that could disrupt PayPal's business.
For the icing on top, many fintech companies were pummeled in November as inflation became more than transitory and the omicron variant worried investors.
Now what
PayPal stock fell after the earnings release, and it's gone even further south since then. It's now down 21% year to date, and shares are trading at 44 times trailing-12-month earnings. That's not cheap, but it's a lot less than high-growth fintech companies like competitor Square, which trades at 189 times trailing-12-month earnings. That seems like a reasonable discount for a company that's still posting double-digit growth.
And while it might be prudent for investors to consider the overwhelming competition PayPal faces from newer faces in the crowd, don't underestimate how the company has been able to keep its top spot through new initiatives, such as its recent app makeover, and acquisitions that have beefed up its repertoire and kept it as the dominant player in its game.
