As a result of massive government stimulus and heightened consumer interest in online shopping during the pandemic, PayPal Holdings (PYPL 0.63%) benefited greatly. The business grew revenue 20.7% and 18.3% in 2020 and 2021, respectively, and generated an outstanding $10.4 billion in free cash flow over the two-year period. However, shareholders are wondering how successful PayPal can be in a more normalized world where physical retail shows strength again.
When the company reported mixed financial results for Q4 2021, as well as weaker-than-expected revenue guidance for the current year on Feb. 1, the stock took an immediate hit. Since that financial release, shares are down roughly 35% (as of Feb. 15), a clear sign that investors have soured on the digital-payments behemoth.
Despite investor pessimism, this fintech pioneer is still a dominant business. Let's take a look at one number that proves why.
In 2021, PayPal processed an incredible $1.25 trillion in total payment volume (TPV). To put this figure into perspective, there were only 14 countries that had a higher gross domestic product in 2020 than the dollar amount that ran through PayPal's network. No matter how you slice it, this is a gargantuan amount.
Visa, the largest card-payments network in the world that was founded in 1958, processed $10.4 trillion in volume in its fiscal 2021 (ended Sept. 30). It's not a direct apples-to-apples comparison because Visa is an underlying network connecting consumers, merchants, banks, and businesses, and it really only competes with Mastercard. However, it still demonstrates how powerful PayPal has become in the payments industry.
Being accepted at 76% of the top 1,500 online retailers in North America and Europe puts PayPal far ahead of other digital wallets. And this ubiquity adds value for the company's user base of 426 million active accounts.
Management has also done a great job at introducing new features to encourage users to engage more with the platform. Cryptocurrency trading and "buy now, pay later" functionality, as well as transforming the flagship PayPal mobile app into an all-in-one financial services tool, are initiatives that help to boost TPV.
What's more, the announcement to allow Amazon customers in the U.S. to check out with their Venmo balances has the potential to drive even more activity and volume for PayPal's business. Venmo started out as an easy way to send money to friends, but the service now offers credit cards and lets small merchants accept payments from customers. It's still very early in its monetization efforts, something the Amazon partnership should help.
Investors can easily get caught up in the quarterly results of the businesses they own. And the financial media only exacerbates this obsession with short-term results. This situation only makes it more worthwhile to take a step back, zoom out, and focus on the bigger picture.
PayPal is still thriving, and its monster TPV number proves it. Only when this figure's growth starts to slow down significantly should investors begin to worry -- but that time isn't now.
After a record year, management does not expect the activity on PayPal's platform to slow down anytime soon. In fact, they predict that TPV will reach $1.5 trillion in 2022, which would be a 20% year-over-year jump. The company's importance in the world of payments will only continue to increase going forward.
PayPal is certainly facing some near-term headwinds. Most notable is eBay's migration to its own payments platform, which is masking PayPal's underlying business strength. Other than that, inflation and supply-chain challenges, as well as the ongoing pandemic, are problems that aren't unique to PayPal. I believe the company will be able to navigate the current economic environment.
Above all else, investors should focus on PayPal's TPV trends going forward. This is the ultimate gauge of the company's dominance.