What happened
Shares of digital payments behemoth PayPal Holdings (PYPL 0.34%) ended 2021 down 19%, according to data provided by S&P Global Market Intelligence. This performance lagged behind the S&P 500, which produced a superb return of 27% for the year. Two straight quarters of decelerating revenue growth are causing investors to question the outlook for PayPal.
So what
PayPal benefited from the surge of online shopping during the pandemic. Sales and total payment volume (TPV) in 2020 jumped 21% and 31%, respectively, year over year. And the stock more than doubled that year. 2021 was characterized by slowing revenue growth, particularly as consumers dealt with fading government stimulus. Additionally, PayPal's margins have come under pressure in recent quarters due to rising marketing, technology, and development expenses.
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During the company's third-quarter 2021 earnings call, management provided sales guidance of $30 billion for 2022 that disappointed Wall Street. In October, the stock started trending down after rumors swirled that PayPal was in talks to acquire social media platform Pinterest in a possible $45-billion deal. PayPal came out and said that it was not pursuing a purchase of Pinterest.
Competitor Block, formerly known as Square, also had a down year, shedding 26% of its value in 2021. This should ease any investor worries that PayPal's performance was specific to the company.
Now what
Investors are wondering what the future of PayPal looks like as the world slowly tries to move past the pandemic. Digital payments certainly received a boost in 2020, but with the return of in-person shopping, will PayPal get back on track and produce the market-beating returns that investors expect of it?
If we take a step back and focus on the bigger picture, there's a lot to like about this business. As of Sept. 30, PayPal counted 416 million active accounts, up 15% year over year. The company processed $310 billion in TPV during the three-month period, which is an astronomical amount. The secular shift toward electronic payments is a real and sustainable trend, and PayPal is at the forefront.
CEO Dan Schulman one day hopes the company will have 1 billion active users, a feat that would entail people viewing PayPal as a one-stop financial shop. New upgrades to the flagship app, like bill pay, early direct deposit, shopping deals and rewards, and a savings account, make it more appealing. Sometime this year, Amazon customers in the U.S. will be able to check out with their Venmo account, a huge partnership for the payments enterprise.
It's hard not to believe that PayPal's stock, now trading at a nearly two-year-low price-to-earnings ratio of 46, will bounce back nicely in 2022. The business has a massive (and growing) customer base and is introducing new features to drive engagement, all of which should support healthy revenue and profit increases for the current year and beyond.
