PayPal (PYPL 0.02%), which has been at the forefront of digital payments for two decades, is not immune to the market's whims. Growing sales and profits aren't going to be enough to prevent the stock from finishing 2021 in the red.
As is the case with pandemic winners like Roku, Teledoc, and Zoom, investors have become pessimistic about PayPal's prospects in a post-pandemic world. Since hitting an all-time high of $308.53 in July, PayPal's stock has dropped 38%.
Is this fintech leader a buy after its poor performance in 2021?
Image source: Getty Images.
The market is pessimistic
During the most recent quarterly update, management's disappointing guidance certainly hurt the stock. Forecasts of fourth-quarter revenue of $6.9 billion (at the midpoint) and 2022 estimated sales of close to $30 billion weren't well-received by Wall Street.
John Rainey, PayPal's CFO, admitted that coming up with a financial outlook in this environment is proving to be very challenging. "If it weren't difficult enough to forecast with the reopening of the economy, we overlay eBay on top of the supply chain issues and inflationary pressures and the impact that can have on our business. And it makes it very complex to forecast," he said on the Q3 earnings call.
The extreme uncertainty in the economy today, propelled by the fast-spreading coronavirus omicron variant, definitely makes the near-term outlook unclear. Nevertheless, PayPal's revenue and net income continue marching higher with each passing quarter, making the stock's underperformance this year unwarranted.
PayPal is still dominating
I think it's best to take a step back and consider the bigger picture and long-term outlook for PayPal. The business has some positive developments working in its favor as we look ahead to 2022 and beyond.
By being the pioneer of the digital-payments space for more than 20 years, this long history has resulted in massive scale. PayPal currently has 383 million active individual accounts and 33 million active merchant accounts on its platform. This huge user base is a significant competitive advantage. Perhaps even more remarkable is that PayPal processed a whopping $310 billion in total payment volume during the third quarter, up 26% year over year.
PayPal is widely recognized as the leading payments brand when it comes to innovation in the industry. Earlier this year, the leadership team introduced an updated PayPal mobile app, with features like a full digital wallet, high-yield savings account, shopping deals and rewards, and bill pay. The functionality and ease of use is unmatched. Stock-trading capabilities are anticipated to be coming soon.
The potential for new acquisitions and partnerships also provide a nice tailwind for the business. PayPal's recent purchase of Japanese buy now, pay later enterprise Paidy extends the company's reach to the world's third-largest e-commerce market that still conducts 70% of purchases with cash. Additionally, the recently announced partnership with Amazon will allow U.S. customers to use Venmo as a checkout option on the e-commerce juggernaut's website and mobile app.
Consider buying shares
Despite missing Wall Street's revenue estimates for two straight quarters, PayPal's numbers still look solid. The user base is growing rapidly, engagement keeps ticking up, and the innovative culture is robust. Let's also not forget just how profitable this business is, generating a 21% free cash flow margin in Q3.
There are still a few trading days left, but 2021 is shaping up to be PayPal stock's first down year since it spun off and became a public company in July 2015. Nonetheless, it has produced a market-crushing return of more than 400% during that 6 1/2-year stretch. Even though the fundamentals remain intact, sentiment has soured on PayPal.
Smart investors should view this as a fantastic opportunity to buy shares right now.
