PayPal Holdings (PYPL -1.22%) recently announced first-quarter earnings. The results were roughly in line with expectations, but growth is slowing and management lowered full-year guidance. The deteriorating macroeconomic environment and the loss of eBay's business continue to weigh heavily on the fintech company, and the stock has fallen over 70% from its all-time high.
Does that make PayPal a bargain? Let's dive in.
Dominant market position
PayPal operates one of the largest payments networks in the world, connecting 394 million consumers with 35 million merchants. Its portfolio comprises a wide range of financial products, including digital wallets and shopping tools for individual consumers, and payment processing, fraud prevention, and financing services for businesses. The company also provides point-of-sale hardware and software to help merchants manage stores across physical and digital channels.
Image source: Getty Images.
Collectively, PayPal's scale and breadth have made its brand synonymous with digital payments, helping it become the most accepted digital wallet in North America and Europe. Management puts its addressable market at $110 trillion. For context, PayPal handled about $1.3 trillion in total payment volume in the past year, or just over 1% of its market opportunity.
Disappointing financial results
PayPal's financial performance has been underwhelming lately. In the first quarter, revenue rose just 7% to $6.5 billion, and non-GAAP earnings dropped 28% to $0.88 per diluted share. During the earnings call, management noted that supply chain disruptions and high inflation were a drag on the top and bottom lines, but PayPal is also struggling with the loss of a big customer.
In 2018, eBay began to migrate away from PayPal, partnering instead with payment processor Adyen. That transition has taken place more quickly than management anticipated, and it has been a significant headwind for the business. Case in point: Excluding eBay, PayPal grew revenue by 15% in Q1 2022 and non-GAAP earnings fell just 11%. It's also worth noting that non-GAAP earnings rose 84% in Q1 2021, meaning the company faced a very tough year-over-year comparison.
Fortunately, PayPal will lap the worst of the eBay impact this quarter, meaning it won't be a significant headwind in the second half of 2022. But management still lowered full-year guidance, the midpoint of which now calls for a 12% increase in revenue and a 16% drop in non-GAAP earnings. But once PayPal gets over that hump, top- and bottom-line growth could reaccelerate in 2023. To help make that happen, the company is working to expand its ecosystem of products and services.
Strong growth strategy
Last September, PayPal introduced its redesigned digital wallet, which now supports crypto trading, in-store QR code payments, and shopping rewards, as well as "buy now, pay later" and bill pay features. During the Q1 earnings call, management provided upbeat insight, noting that "users are engaging with more features and driving incremental average revenue per account." To reinforce that trend, PayPal is currently adding a high-yield savings product to the digital wallet, and it plans to introduce additional financial services and commerce features in the coming quarters. That's particularly timely, because the number of consumers using a digital wallet is expected to double between 2021 and 2025, according to Juniper Research.
PayPal is also taking steps to monetize Venmo (its other consumer-facing digital wallet) more effectively. In the last two years, it has debuted the Venmo credit card, enabled in-store QR code payments, and launched crypto trading on the platform. Additionally, consumers can now use Venmo to make purchases from a growing number of online retailers, including DoorDash and Revolve, and Venmo payments are coming to Amazon later this year.
Is PayPal stock a buy?
PayPal isn't out of the woods yet, but the future looks brighter. The growing popularity of digital payments and online shopping should be a tailwind for its business, and despite a string of disappointing financial results, the company still benefits from a strong competitive position in a massive market. From that perspective, with the stock trading at four times sales -- its cheapest valuation since going public in 2015 -- PayPal does indeed look like a bargain buy right now.
