PayPal Holdings (PYPL -1.60%) was once considered a top long-term play on the growing digital payments market. But over the past 12 months, its stock price has tumbled 60% and erased all of its gains from the previous three years.
That precipitous decline was caused by three consecutive quarters of mixed earnings, a rumored bid for Pinterest that suggested it was desperate for growth, and weak near-term guidance. The broader sell-off in higher-growth tech stocks exacerbated that pain.
Some investors might now be drawn to PayPal as a value play, since it looks historically cheap at 24 times forward earnings. However, they should review these four bright red flags before pulling the trigger.
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1. PayPal hasn't fully abandoned its investor day targets yet
During its investor day presentation last February, PayPal claimed its number of active accounts would nearly double from 377 million in 2020 to 750 million in 2025, and that its revenue would more than double from $21.5 billion to $50 billion during those five years.
In 2021, PayPal's number of active accounts rose 13% to 426 million as its revenue grew 18% to $25.4 billion. But in its fourth-quarter report it abruptly abandoned its goal of reaching 750 million active accounts. That announcement, which came just one quarter after CEO Dan Schulman said he was "quite confident" in hitting that goal, raised red flags.
It also suggested that PayPal's rumored interest in Pinterest, which served 431 million monthly active users (MAUs) at the end of 2021, was driven by a desire to buy new users to reach that target. When those talks ended, PayPal likely realized it couldn't reach 750 million accounts on its own.
The bulls will likely argue that bad news is already baked into the stock. However, PayPal hasn't abandoned its goal of doubling its revenue by 2025 yet. If it abandons that goal as well, its stock could plunge again.
2. There are competitive threats for Venmo
Instead of aggressively gaining new accounts, PayPal plans to grow its average revenue per user (ARPU) by rolling out new features and locking users into growing platforms like Venmo, which provided peer-to-peer payment services to over 83 million users in the U.S. at the end of 2021. That's up 19% from just under 70 million accounts at the end of 2020.
However, Venmo still faces intense competition from two other peer-to-peer payment platforms, Zelle and Block's (SQ -2.03%) Cash App.
Zelle, which is backed by a consortium of major U.S. banks, grew its total transaction volume by 59% to $490 billion in 2021. Venmo only grew its total transaction volume by 44% to $230 billion last year. Zelle's higher volume and growth rate suggest it's locking in users with its direct integration into mobile banking apps.
Block's Cash App grew its total number of monthly transacting users by 22% to 44 million at the end of 2021. In addition to peer-to-peer payments, the Cash App is a popular platform for free stock trades, Bitcoin purchases, tax filing tools, and other financial services. The stickiness of that sprawling ecosystem makes it another major threat to Venmo.
3. Are possible layoffs in the future?
If PayPal wants to expand its fintech ecosystem with new features, then it should be increasing its headcount. However, the company reportedly just laid off its emerging technologies research team -- which was in charge of its cryptography, quantum computing, and distributed ledger technologies -- after a new chief information security officer took over in January.
That team only consisted of four people, but it signals a shift away from experimental technologies as the growth of its core platform slows down. Therefore, we might see PayPal start to lay off other teams if their products don't attract new users or meaningfully boost the company's ARPU.
4. The CFO suddenly departed
Lastly, PayPal's CFO John Rainey recently resigned to take on the same position at Walmart. Rainey had held that position ever since PayPal was spun off from eBay seven years ago, and his departure raises red flags for two obvious reasons.
First, Rainey helped set PayPal's goal of generating over $50 billion in revenue by 2025. Leaving the company right now, as investors are still questioning that long-term goal, should be considered a bright red flag.
Second, a new CFO might reverse PayPal's focus on ramping up its investments in new features -- including its "buy now, pay later" (BNPL) services, e-commerce tools, a digital wallet, and more -- for its "super app." Doing so might strengthen its near-term earnings growth, but it could also erode its defenses against Zelle, Block, and other competitors.
It's still not a bargain
PayPal's stock has been crushed, but it can't be considered a bargain yet. It repeatedly over-promised and under-delivered over the past year, and its management clearly grew complacent in the face of intensifying competition. The company isn't doomed yet, but these four red flags indicate investors should brace for more bad news over the next few quarters.
