The stock market had a generally strong day, with the S&P 500 rising by 0.8% by 3 p.m. ET and the other major market indices firmly in positive territory. However, PayPal (PYPL 0.34%) was getting absolutely hammered. With an hour left to go in the trading session, PayPal shares were down by more than 25%.
The short version is that PayPal's earnings report was a disaster, and in several different ways. On the headline numbers, the company missed earnings-per-share (EPS) expectations, but that was the least of its issues.
Let's run down the highlights:
- PayPal expects $0.87 per share in first-quarter earnings, which is well below what analysts had been expecting.
- The company's full-year revenue guidance for 2022 came in below estimates, with the company blaming inflation pressures.
- User growth fell short of expectations, and the company reported 4.5 million "illegitimate" accounts it had to back out from the numbers.
- Perhaps most significantly, PayPal essentially conceded that it's unlikely to hit the ambitious user-growth targets it has set for itself in the past, saying that its focus would be on "sustainable growth and driving engagement."
I won't sugarcoat it: This quarter was a big disappointment. And there are fewer surefire ways to tank a stock after earnings than by giving weak guidance.
However, it's important to take a step back and acknowledge what PayPal is doing right and could propel its revenue higher in the future. For example, it recently entered into a partnership with Amazon to allow for Venmo payments. And PayPal's buy-now-pay-later service has been impressive.
Last, but certainly not least, PayPal generates billions of dollars in free cash flow annually that it can deploy into bolt-on acquisitions to further increase monetization (or potentially buy-back stock if it stays depressed).
The bottom line is that PayPal certainly has some headwinds right now. But if it can figure out how to produce growth that's more in line with expectations, this could be a buying opportunity for patient long-term investors.