Investors who sold their PayPal (PYPL -1.14%) shares last year because they were worried about the impending split from eBay are probably feeling pretty good at the moment. PayPal stock is tumbling in response to forward-looking guidance that was slightly below expectations. The stock was down more than 24% as of 10:29 a.m. ET on Wednesday.
Should investors scoop up shares of this former stock market darling off the floor or is it still too risky? Here's what you should know.
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Why PayPal stock tanked
PayPal recently reported fourth-quarter earnings results that came in $0.01 below consensus estimates at $1.11 per share. Revenue that grew 13% year over year to $6.92 billion exceeded expectations by around $50 million.
It wasn't the performance that PayPal reported in 2021 that upset the market. The fintech stock plunged because forward-looking guidance provided by management was a bit soft. The company expects first-quarter earnings to reach $0.87 per share while the average Wall Street analyst following PayPal expected the company to predict $1.12 per share.
Investors are a little extra jumpy around PayPal at the moment because eBay's (EBAY 0.31%) migration to self-managed payments happened faster than anticipated. Management thinks eBay put $1.4 billion of pressure on top-line revenue last year.
Reasons to buy
PayPal expects around $600 million worth of pressure from eBay's exodus in the first half of 2022. After that, though, the fintech giant won't have to report eBay-related adjustments anymore.
PayPal ended 2021 with around 392 million active consumer accounts. That makes it an indispensable payment option for 34 million merchant accounts that accept PayPal payments. The number of users isn't the only metric that's growing either, transactions per active account reached 45 last year, an 11% gain compared to 2020.
In 2021, PayPal processed more than $1 trillion worth of payments for the first time in the company's history. PayPal didn't just set a new annual record, it exploded right past the record set in 2020 by processing an astounding $1.25 trillion worth of payments last year.
The loss of eBay stings in the present, but it also makes it a lot easier to partner with competing marketplaces. For example, Amazon is implementing an option to pay with Venmo, a business PayPal acquired back in 2013. At the moment, its growing user base can also use the Venmo app to open a new credit card account or trade cryptocurrencies.
Know the risks
PayPal has a large lead but it isn't operating in a vacuum. Investors will want to keep one eye on other fintech businesses building out their own super apps.
PayPal is the only company with an enormous client base that is equally popular among merchants and consumers. That makes it one of several likely winners in the ongoing race to build a super app that streamlines payments for goods and services with everyday financial services.
PayPal generated a whopping $5.4 billion worth of free cash flow in 2021. That means the company has all the financial resources it needs to stay a step ahead of the competition without relying on debt. This is extra important now that interest rates are expected to rise later this year.
The future's still a little too uncertain to call PayPal a safe stock to buy right now but it could be a great addition to a well-diversified portfolio. With strong profits and unparalleled acceptance among both merchants and consumers right now, the recent dip will probably end up looking like a minor hiccup when we look back at PayPal's performance a decade from now.
