Since hitting an all-time high of $308.53 last July, shares of PayPal Holdings (PYPL 0.79%) have fallen dramatically, losing more than 60% of their value at Wednesday's prices. The company's revenue growth has decelerated, as the pandemic boost seems to be fading away. Investors are now questioning the payments giant's future.
Additionally, the company's massive user base, now at 426 million, isn't likely to expand at the rapid pace we've seen over the past few years. That's because PayPal's management team will no longer try to add as many customers to its platform as possible, instead opting to focus on increasing engagement.
Here's why that's not necessarily a bad thing.
Quality over quantity
In 2020 and 2021, PayPal added a total of 121 million net new active accounts. The business undoubtedly benefited from the rise in electronic payments, as traditional brick-and-mortar retailers were temporarily shuttered during the initial stage of the pandemic.
2022 won't come close to resembling the recent past for PayPal, as management expects to add just 15 million to 20 million net new active accounts during the year. And CEO Dan Schulman even walked back his prior target of having a total of 750 million active accounts by 2025.
Instead of quantity, the leadership team will now emphasize gaining high-value customers who are engaging more with PayPal or Venmo and will increase revenue per active account. To do this, PayPal is paring back on utilizing incentive-based campaigns, which actually resulted in 4.5 million illegitimate accounts (that needed to be deleted) in the most recent quarter. Capital will now be invested mainly to get existing customers to engage more, a strategy that management believes reduces churn and results in a stickier, more lucrative user base.
"From an overall marketing point of view, our marketing investment, it's going to be relatively on par with what we did last year, but we are going to rebalance quite a bit toward marketing new products and services to our base, possibly additional investment in incentives for engagement and other things like that," Erica Gessert, PayPal's senior vice president of finance and analytics, said on the fourth-quarter earnings call.
New features like buy now, pay later and cryptocurrency trading have shown outstanding success at getting customers to transact more on PayPal's platform. These types of users generate a far better return on investment for the business than less engaged accounts, a group PayPal will start to let drop off instead of trying to keep.
Should investors worry?
Even if new user signups slow down this year, the management team thinks 2023 will be a return to normalized levels of customer adds. They forecast the massive fintech will add roughly 35 million new accounts on an annual basis starting next year, when some of the pandemic-related choppiness hopefully starts to subside.
Adding 35 million highly engaged net new active accounts year in and year out -- which don't require costly incentives and promotions on PayPal's part -- seems like a positive situation for the company. Therefore, I don't think investors have anything to worry about here. All of the problems facing PayPal right now appear to be temporary, yet the market is treating the business like its remarkable success is sure to be over, punishing the stock over the past several months.
Shareholders should pay close attention to revenue per active account going forward to make sure the leadership team is executing on its strategic pivot. Because the stock has been beaten down so much, now might be a good time to buy PayPal shares for investors who have been on the sidelines.