I won't sugar-coat it. PayPal (PYPL 2.90%) has been one of the worst-performing stocks in the financial sector recently. Shares are down by more than 65% from their mid-2021 all-time high and have declined by 46% so far in 2022 alone. It's been a rapid fall for the fintech powerhouse many investors had been predicting would become a trillion-dollar company.
However, despite the terrible stock performance, PayPal could still be worth a closer look for patient investors willing to ride out the ups and downs. Here's a rundown of why PayPal has struggled recently, and why it is now at the top of my watch list.
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PayPal's latest earnings report wasn't pretty
PayPal beat analyst estimates on revenue in the fourth quarter, but beyond that, the earnings report was a disappointment for investors. The company missed earnings expectations, didn't live up to its user growth expectations, and announced that it found 4.5 million "illegitimate" accounts. PayPal also forecast slower-than-expected revenue growth in 2022 and cut its projections for first-quarter earnings, and as any experienced investor can tell you, there are few more reliable ways to make a stock go down than issuing weak guidance.
PayPal also said that its focus going forward would shift toward maximizing the potential of its user base, as opposed to growing its user base. User growth will still be a priority, as the fintech giant expects at least 15 million net new accounts in 2022. But PayPal has 426 million active accounts, and this move essentially concedes that the company's plan to get to 750 million within a few years may not be a realistic one.
Don't ignore the good
For one thing, PayPal is still the largest payment platform in the business, with over $1.3 trillion of annualized payment volume flowing through its network from 426 million active users.
PayPal has net cash (cash minus debt) of more than $7 billion and is a very profitable business. It generates over $5 billion in annualized free cash flow with margins over 20% that can be used to invest in the business, make acquisitions, or invest in other ways.
Recent partnership and monetization activity has been rather impressive too. Just to name a couple of new partners, Roku (ROKU -10.29%) and Instacart both added PayPal Checkout in the fourth quarter. The recently announced partnership with Amazon (AMZN 3.43%) that will enable checkout with Venmo starting this year could be a big boost toward monetization of that side of the business. Cryptocurrency and credit cards have helped increase engagement and revenue.
There's also the buy-now-pay-later business that saw $3.2 billion in total volume in the fourth quarter, more than four times the volume in the fourth quarter of 2020. This is still a young, and potentially lucrative, part of the company that could have plenty of room to grow.
A beaten-down fintech that still has trillion-dollar potential
To be sure, it may take a little longer than investors previously thought, but PayPal still has the potential to become a trillion-dollar business over the long run. Growth has slowed, not stalled. The company is still wildly profitable, which gives it billions of dollars in capital each year to invest in its growth without diluting investors, and it could still be in the early stages of monetizing its user base, particularly on the Venmo side. With shares trading for less than five times trailing-12-month revenue (down from a multiple of more than 15 in July 2021), PayPal could be an incredible bargain.
