What happened
Shares of PayPal (PYPL 1.56%) plunged by 34.9% in February, according to data provided by S&P Global Market Intelligence.
The online payments company has seen its stock fall by 42.6% year to date, in line with declines across a wide swath of growth stocks.
Image source: Getty images.
So what
PayPal had reported a strong set of earnings to cap off its fiscal 2021 (FY2021) at the start of the month. Total payment volume (TPV) on its platform jumped by 33% year over year to $1.25 trillion, which helped to lift the company's net revenue by 18% year over year to $25.4 billion. Free cash flow improved from $5 billion in FY2020 to $5.4 billion, while a total of 48.9 million net new active accounts were added, bringing total active accounts to 426 million.
Investors were, however, more focused on the downbeat guidance that PayPal gave for its fiscal 2022's first quarter. Revenue was expected to grow by just 6% year over year as eBay's pullout from the company's platform was swifter than anticipated. As a recap, revenue had climbed by 31% year over year during PayPal's fiscal 2021's first quarter.
The other negative surprise was PayPal's forecast for net new account additions. Chief financial officer John Rainey had announced, during the company's latest conference call, that management had dropped its medium-term target of 750 million accounts. The problem was that the company had been too successful in adding new accounts, but a portion of these accounts had low engagement and did not provide an adequate level of return for the company's efforts. PayPal has decided to moderate its new account additions to pursue more profitable growth, leading to the company forecasting new account additions of 15 to 20 million for FY2022. This level of additions was significantly lower than the close to 49 million new accounts added in FY2021.
Now what
Investors cannot be blamed for feeling disappointed at this change. However, this muted forecast should be seen in a positive light. For one, management has shown its candor by admitting that it had grown too quickly without focusing on the right financial metrics, and the level of honesty displayed is commendable. The company is also sacrificing some short-term growth to ensure a more sustainable long-term growth trajectory, a trait which is admirable given Wall Street's incessant focus on quarterly projections.
It's important to remember that PayPal remains the most accepted digital wallet across North America and Europe, with more than three-quarters of the 1,500 largest online retailers using its platform. The company's new digital wallet has also seen increased adoption among shoppers and cryptocurrency users. Investors need to realize that they will have to endure some short-term pain before seeing better numbers at PayPal by the second half of this year.
