This has been a lackluster year for stock market investors. The S&P 500 is down 14% in one of the market's worst starts to a new year ever.
Investor concerns about inflationary pressures, rising interest rates and geopolitical conflicts are the main culprits. While most stocks have taken a hit, the brunt of the sell-off has been among some of the fastest-growing companies with high valuations. One company trading near its cheapest valuation ever today is PayPal (PYPL 3.54%).
The payments giant was a big beneficiary of pandemic-related policies, including online shopping and contactless payments. As a result, the stock exploded higher and, at one point last year, traded at a price-to-earnings ratio (P/E) of more than 100. However, since peaking in late July, PayPal is down big, losing more than 70% since that time.
Reduced forecast and change of focus worried investors
The company put up stellar results in 2021, surpassing $1 trillion in total payments volume (TPV) for the first time. Despite this, investors were concerned because of management's lowered forecast.
Last year, the company projected revenue growth for 2022 of about 18%. It lowered that estimate to 15% to 17% when it announced earnings in February. This reduced forecast made investors nervous and sent the stock down 24% the following day. The company also announced it would change its strategy, focusing on user engagement with the PayPal app instead of targeting user growth.
First-quarter earnings results were mixed
PayPal's first quarter saw growth, albeit slower when compared with recent years. The payments processor's TPV grew 13% during the quarter, while revenue grew 7% to $6.5 billion. Expenses also ticked up for the company, and net income dropped 54% from last year to $509 million.
During its recent earnings call, management again lowered its revenue forecast for 2022, expecting 11% to 13% growth this time. Investors have continued to hammer the stock, and PayPal is now trading at its lowest price-to-earnings ratio since at least 2016.
Here's what investors should focus on
Despite the slower growth, management's focus on increasing user engagement looks like it is paying off. Net new active accounts grew 9% in the first quarter, and total payment transactions increased 18%. This growth came as transactions per active account grew by 11%.
Transaction per active account is a key metric that management is now focused on maximizing -- as opposed to just adding new customers. This focus on user engagement comes because one-third of PayPal's customers drive a vast majority of its volume. By focusing on getting those users to engage more, PayPal can increase its transaction revenue more cost-effectively than advertising to add users.
Sell-offs create opportunities
While uncertainty remains in the economic outlook, PayPal is still a massive player in the payments industry. The last three years have been tremendous for PayPal, as total payment volume has grown at a compound annual growth rate of 29% while adding 120 million new accounts. (These figures exclude eBay, which has dropped PayPal as its payments processor.)
So many stocks have taken a hit amid persistent market volatility in 2022. For long-term investors, this creates an excellent opportunity to buy a stellar company like PayPal at an unexpectedly cheap valuation.