PayPal Holdings' (PYPL 0.11%) stock price recently plummeted to its lowest levels since May 2020 after it posted its fourth-quarter earnings report on Tuesday.
The digital payment company's revenue rose 13% year over year to $6.92 billion, which beat estimates by $30 million. However, its adjusted earnings per share rose a mere 4% to $1.11, and missed expectations by a penny.
For the first quarter, PayPal expects its revenue to grow just 6% year over year (14% after excluding eBay (EBAY -0.69%) from both periods), and for its adjusted earnings per share to decline 29%. Analysts had expected its revenue to grow 12%, and for its adjusted earnings to dip just 5%.
Image source: PayPal.
PayPal's full-year guidance also broadly missed analysts' expectations. It expects its revenue to rise 15%-17% (19%-21% upon excluding eBay), and for its adjusted earnings to grow 0%-3%. Analysts were expecting its revenue and adjusted earnings to grow 18% and 14%, respectively.
Is PayPal simply experiencing a temporary slowdown, or do those weaker-than-expected numbers hint at deeper problems? Let's dive deeper into PayPal's disappointing quarter to see if its beaten-down stock is still worth buying.
PayPal's key growth rates
PayPal's number of active accounts increased 13% year over year to 426 million during the fourth quarter. Its total payment volume (TPV) rose 23% to $336.5 billion as its total payment transactions increased 21%. But all three growth metrics decelerated from its previous quarters:
| Growth (YOY) | Q4 2020 | Q1 2021 | Q2 2021 | Q3 2021 | Q4 2021 |
|---|---|---|---|---|---|
| Active Accounts |
24% |
21%* |
16% |
15% |
13% |
| TPV |
36% |
46% |
36% |
24% |
23% |
| Transactions |
27% |
34% |
27% |
22% |
21% |
| Revenue |
23% |
29% |
17% |
13% |
13% |
Data source: PayPal. Currency neutral basis. *Includes acquisition of Honey. YOY = Year over year.
The midpoint of PayPal's forecast for 15%-17% revenue growth in 2022 would also represent a slowdown from its 17% constant currency growth in 2021 and 22% growth in 2020. It attributed that deceleration to five factors: supply chain challenges for merchants, inflationary headwinds for consumers, COVID-19 related challenges for travel and event bookings, the lack of new stimulus checks, and slower e-commerce sales in a post-lockdown world.
eBay's transition from PayPal to Adyen (ADYE.Y 0.13%), which started in 2020, will also continue to throttle PayPal's growth until the second half of 2022. But excluding eBay, PayPal's annual revenue growth has consistently remained north of 20%, and it's still securing new partners -- including Gap, Instacart, DoorDash, and Amazon -- to offset its loss of eBay's revenue.
PayPal's take rate, or the cut of each transaction it retains as revenue, also improved sequentially to 2.04% in the fourth quarter and reversed a two-year trend of sequential take rate declines. That improvement, which PayPal attributes to a better product mix and higher prices, indicates it still has decent pricing power in the crowded digital payments market.
Higher investments, declining margins
PayPal's year-over-year growth will remain bumpy until the macro headwinds wane and it fully laps its decoupling from eBay. But as PayPal's revenue growth decelerates, its operating margins are also contracting:
| Period | Q4 2020 | Q1 2021 | Q2 2021 | Q3 2021 | Q4 2021 |
|---|---|---|---|---|---|
| Adjusted Operating Margin |
24.7% |
27.7% |
26.5% |
23.8% |
21.8% |
Data source: PayPal.
PayPal's operating margins benefited from a release of $312 million in credit reserves throughout 2021, but that boost was partly offset by higher investments in engineering, technology, marketing, and customer support to expand its ecosystem. PayPal's new "super app" -- which bundles together its digital wallet, peer-to-peer payments, buy now, pay later (BNPL) tools, and other e-commerce services -- showcases those efforts.
PayPal expects its adjusted operating margin to decline from 24.8% in 2021 to about 23% in 2022 as it laps the credit reserve benefit and continues to ramp up its investments in its ecosystem. In other words, investors should brace for uneven revenue growth with depressed earnings throughout 2022 -- but those headwinds could fade by 2023.
But what about those investor day promises?
Last but not least, PayPal abandoned its target for hitting 750 million active accounts by 2025, which it set during its investor day presentation a year ago. It said that instead of focusing on gaining lower-value users, it would concentrate on increasing its average revenue per user (ARPU) with new services, and that it would disclose its ARPU growth rates in future quarters.
PayPal didn't abandon its goal of doubling its revenue from $25.1 billion in 2021 to over $50 billion in 2025, but the abrupt elimination of its active account forecast -- just one quarter after CEO Dan Schulman said he was "quite confident" in reaching 750 million -- raises red flags.
Should you buy the dip?
At $144 a share, PayPal's stock still trades at about 30 times forward earnings -- which is a bit pricey for a company that expects to generate low single-digit earnings growth this year. That higher multiple could also reduce its appeal as rising inflation and higher interest rates crush pricier growth stocks.
I own some shares of PayPal, but I'm not adding any more shares until the company shows some clearer signs of stabilizing its revenue growth and operating margins. Management's overly bullish forecast for 2025, which was only partially abandoned, also hints at more heartbreak down the road.
