PayPal Holdings (PYPL 0.48%) reported its fourth-quarter 2021 financial results last week, with revenue of $6.92 billion beating Wall Street estimates and adjusted earnings per share (EPS) of $1.11 missing estimates during the three-month period. As is always the case, however, investors focused heavily on management guidance.
Let's just say the leadership team's forecast really disappointed investors. This once-surging fintech was a major pandemic winner, but it's now facing some serious headwinds. And the stock price had crashed a jaw-dropping 29% by the afternoon of the day after the report's release.
Here's what you need to know.
Lowering 2022 projections
For the current quarter, PayPal's management expects adjusted EPS to come in at $0.87, a 28.7% decline from the prior-year period. This significantly missed Wall Street's forecast of $1.16.
And for 2022, leadership sees revenue increasing 15% to 17% year over year compared to the $25.4 billion in sales in 2021. Analysts were expecting growth of 17.9%.
External factors like soaring inflation, the fading impact of government stimulus, and supply chain challenges for its small-business merchants are creating a weaker environment for electronic payments. These are problems that are plaguing many businesses across the global economy, so they're not unique to PayPal.
But it is discouraging to see that in a strong economy, with rising home prices and extremely low unemployment, management is tempering expectations. Slower e-commerce sales over the holidays are also to blame.
Moving away from eBay
Online auction house eBay (EBAY 1.01%) is migrating all of its seller payments off of PayPal's platform. Excluding volume from eBay, PayPal's sales have consistently increased in excess of 20% on an annual basis. And eBay represented just 3% of PayPal's revenue -- and less than 3% of total payments volume -- in the fourth quarter.
"In the second half of the year, I look forward to being able to stop adjusting for eBay and letting the strength of our core results speak for themselves," CEO Dan Schulman said on the fourth-quarter 2021 earnings call. It looks like we'll get a clearer picture of how solid PayPal's underlying business is in about six months' time.
While the company is losing eBay, it's gaining Amazon in a partnership that will allow the latter's U.S. customers to check out with their Venmo accounts. Nonetheless, the move away from eBay is a big deal, shining light on how much PayPal relied on its former parent company. After affecting PayPal's revenue by $1.4 billion last year, management believes the eBay transition will pressure sales by a total of $600 million through the first two quarters of 2022.
Growth of new active accounts
During the fourth quarter, PayPal added just 9.8 million net new active accounts, missing prior guidance by a whopping 6 million new users. What makes the situation even worse is that 3.2 million accounts, slightly less than one-third of the quarter's new customers, came from the company's $2.7 billion acquisition of Japanese buy now, pay later leader Paidy. The organic growth has dramatically slowed.
Management did highlight that it needed to remove 4.5 million "illegitimately created" accounts in the last quarter that were opened as result of the company's greater use of incentive campaigns. This is what caused the business to miss guidance. Looking ahead, PayPal is expected to bring on 15 million to 20 million new users in 2022, far less than the 48.9 million and 72.7 million it added in 2021 and 2020, respectively.
About a year ago, Schulman was confident during an investor day presentation that his company could reach an ambitious target of 750 million active accounts by 2025. He reneged on this goal, as leadership says it will now emphasize "sustainable, high-quality growth to drive engagement and increased revenue per active account."
Perhaps the weaker outlook for user growth, which is absolutely vital to PayPal's ultimate success, is what's hammering the stock right now. Therefore, the business will need to boost sales by getting customers to use the various services more over time. I think it's best to wait until there's more clarity around revenue growth post-eBay and new accounts -- maybe after a couple of quarters -- before you consider buying PayPal shares.