PayPal Holdings (PYPL 2.90%) got off to a rough start in 2022, as investors continued their transition away from tech stocks and into value-oriented companies in order to combat rising interest rates. Right when it seemed matters couldn't get worse, PayPal released discouraging fourth quarter earnings on Feb. 2. As a result, the company lost nearly 25% of its market value, translating to its worst trading day ever. In the past six months, PayPal's stock is down 58%, raising the question for investors if now is a good time to snag shares of the fintech giant.
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A disappointing earnings announcement
PayPal's extended run of impressive earnings came to an end in its most recent quarterly announcement. The company reported fourth quarter revenue of $6.92 billion, slightly beating consensus estimates of $6.89 billion. Earnings per share fell short of consensus estimates by $0.01, coming in at $1.11 per share. PayPal also didn't fulfill its user growth guidance in the quarter: Management cited the creation of 4.5 million illegitimate accounts as the reason for the miss. Forward guidance tripped up investors as well -- management now forecasts that revenue in 2022 will grow between 15% and 17% instead of the original 18% guidance.
The downgrade in revenue growth will predominantly stem from eBay's (EBAY 1.32%) transition to its own payments platform. PayPal, which was spun off from eBay in 2015, will no longer be accepted on the e-commerce platform where it was once the lone payment option. As a result, PayPal expects eBay-related challenges to put $600 million of pressure on the company's top-line in the coming year.
In respect to PayPal's bottom line, management slashed first quarter EPS guidance for 2022 from $1.16 per share to $0.87 per share, a substantial difference from Wall Street's previous expectations. There's no denying that PayPal has recently missed on several fronts of its business. Even so, I believe investors neglected many of the positives that came out of PayPal's recent fiscal year.
Many things are going right
PayPal's fourth quarter earnings announcement pointed to several short-term headwinds that shouldn't impact the company's business in the long run. Investors also failed to appreciate many of the solid elements that came out of FY 2021. For the first time ever, PayPal surpassed $1 billion in total payment volume (TPV), concluding the year at $1.25 billion. Full-year revenue and earnings still enjoyed growth of 18% and 19%, which I think are impressive rates given the colossal size of PayPal's business. And when stripping eBay out of PayPal's operational results, the company experienced even more robust growth.
Non-eBay revenue grew 29% in the fourth quarter and 22% for the full-year, showing glimpses of PayPal's potential once it's fully separated from eBay's e-commerce platform. PayPal's CEO, Dan Schulman, stated that the company will stop adjusting for eBay in the second half of 2022. Investors should interpret this as great news given PayPal's non-eBay growth has been consistently above 20%.
The company's balance sheet and cash flow generation also warrants investors' consideration. PayPal's sizable cash position of $16.3 billion almost doubles that of its $9 billion in debt. Its ability to generate cash flow is even more impressive -- PayPal's cash from operations and free cash flow increased 31% and 38% in the fourth quarter to $1.8 billion and $1.6 billion, respectively. The company is well-suited to continue growing its core business and expanding into new segments without taking on additional debt.
The company recently announced a partnership with Amazon (AMZN 3.43%) to enable customers to checkout with Venmo on the e-commerce platform starting this year. Venmo, which was acquired by PayPal in 2013, has 80 million active users and was able to grow total payment volume by 44% in 2021. The company's buy now, pay later service offering, which is available in eight markets, recorded growth of 325% up to $3.2 billion in total payment volume in the fourth quarter.
An attractive valuation
The latest sell-off in PayPal shares has resulted in significant multiple contraction, suggesting that the company is currently trading at a bargain. PayPal's price-to-earnings multiple of 32 is below pre-pandemic levels despite the major strides its business has made over the past couple years.
PYPL PE Ratio data by YCharts
Block, Mastercard, and Visa, three of the company's primary competitors, are trading at price-to-earnings multiples of 105, 43, and 37, respectively -- all higher than PayPal. I believe PayPal is trading at an attractive and competitive valuation, especially when taking into account its future growth prospects.
A solid time to buy
Growth opportunities like Venmo and buy now, pay later -- combined with the company's strong fundamentals and increasingly alluring valuation -- serve as valid reasons to invest in PayPal today. When we look back several years from now, I believe the massive sell-off that PayPal has suffered will be viewed as nothing more than a bump in the road.
