It's safe to say PayPal Holdings' (PYPL 2.90%) fourth-quarter earnings report was a disaster. After the report was released on Feb. 1, the stock responded by crashing 25% the following trading day, and decreased another 20% in the following weeks. Now down more than 65% from its all-time high set in July, the market is apparently no longer sold on PayPal's potential as an investment.
The stock is now trading for around $102 a share, a level it last reached in April 2020 during the COVID-19-induced market crash. Since then, PayPal has seen massive growth in total payment volume (TPV) and customers, but the market is unwilling to give the business any credit for these advances. Is PayPal doomed, or is it time to go all-in on the stock? Let's take a closer look at this fintech.
Image source: Getty Images.
Red Flag: Slowing growth and poor management projections
During PayPal's Q3 earnings call, management affirmed its long-term goal of achieving 750 million users on its platforms. For reference, there were 416 million active accounts at the end of Q3. Three months later during its Q4 call, management scrapped the projection and said the goal is "no longer appropriate." Such a quick and drastic scrapping of a recently provided objective management is not a good sign.
Management also set 2022 revenue growth guidance at 18% during the Q3 call. Here too, management revised its guidance during the Q4 call down to the 15%-to-17% range. Management cited inflationary effects, labor shortages, and supply chain issues as catalysts. CFO John Rainey said: "if these issues do not improve, it could cause us to be toward the lower end of that range." Missing on two key guidance metrics gave many investors all the information they needed to head for the exits.
To make matters worse, Q1 guidance for revenue was a mere 6%, and non-GAAP (generally accepted accounting principles) earnings per share (EPS) are expected to decline 30% when compared to last year's quarter. Much of the earnings decline can be attributed to the low tax rate PayPal had throughout 2021. With it returning to normal in 2022, full-year non-GAAP EPS are expected to be practically flat.
That's a lot of terrible news investors didn't want to hear during an hour-long call. It isn't hard to understand why the stock sold off -- but was it already down too much to warrant such a reaction?
Green flag: The stock is valued dirt-cheap, and long-term prospects are bright
Short-term goals can be hard for businesses to achieve, and PayPal's blunder demonstrates that. Long-term targets are easier to adjust as macro headwinds (like inflation) are distributed over a longer period, not just three months.
It was also easy to overlook Q4 and full-year results, which were solid. TPV was up 23% year over year during the quarter, and PayPal processed $1.25 trillion in TPV for the full year, which was up 33% over last year's total. Full-year revenue was up 17% -- the same value as the high end of management's 2022 guidance -- and PayPal converted 21% of revenue into free cash flow for a total value of $5.4 billion.
An often-overlooked PayPal metric is its payment transactions per active account, which shows how often PayPal's ecosystem is used by consumers. That metric was up 11% over last year's quarter to 45.4 transactions. Active accounts were up 13% for the quarter, but growth has been decelerating for the metric throughout 2021. While PayPal may not be growing its customer base as quickly as it used to, the PayPal ecosystem is being utilized more by existing customers.
Despite monumental business gains from the pandemic's onset until now, PayPal's valuation has been slashed. For a stock that traded at a price-to-earnings ratio of 50 for the last five years, it now trades at nearly half its previous average value.
PYPL PE Ratio data by YCharts.
PayPal is valued lower than other established payment processing businesses like Visa (a P/E of 37) and Mastercard (a P/E of 42), something that hadn't occurred in the last five years. With the drastic sell-off and still-decent outlook, I think PayPal is a great buy at this point. With a relatively low valuation and growth ahead, growth investors can put their value caps on and own this stock while it's down on its luck.
Another special investor group, the management team, has also taken notice of the low stock price. Dan Schulman, the president and CEO, purchased $1 million in shares on the open market, and two directors purchased $1 million and $500,000 worth of shares as well. Peter Lynch, one of the greatest investors of all time, once said: "insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise."
If investors have a long-term, three-to-five-year ownership horizon, then PayPal's stock represents a great value while it's trading at around $102. It may take most of this year for the company to get its mojo back, but when it does, expect the stock to rocket higher.
