It's unpleasant to analyze losing investments. Nevertheless, it's a task every investor faces eventually.
For owners of PayPal Holdings (PYPL 2.90%), the last 12 months have been brutal. The stock is down 72% from last year's all-time high. In fact, shares are now 20% lower than they were three years ago.
So is it time for PayPal investors to cut their losses and move on? Let's look at the numbers to find out.
Image source: Getty Images.
Operating margins have reverted to the mean
Like many companies, PayPal got a boost during the COVID-19 pandemic. Multiple stimulus checks, combined with pandemic restrictions and lockdowns, drove a surge in online shopping.
Data by YCharts.
With more consumers shopping online, PayPal's earnings before interest, taxes, depreciation, and amortization (EBITDA) margin soared to an all-time high of more than 30% in early 2021. As margins rose, so did PayPal's stock price, which peaked at $310 last July.
However, over the last year, the company's margin has fallen back to earth and now stands at 20.8% -- right in line with PayPal's long-term average. And as margins have snapped back, so has PayPal's stock price.
Revenue growth has stalled
Even more concerning than PayPal's dip in margins is its flagging revenue growth. For years, its robust growth supported the stock's expensive valuation. But in its most recent quarter, revenue growth fell to 7.5%, its lowest level as a public company.
Data by YCharts. YoY = year over year.
Analysts blame inflation for the sagging growth. It is raising costs for consumers and forcing them to cut back on discretionary spending. They also point to increasing competition from Apple Pay and Cash App, which continue to gain market share at the expense of PayPal's Venmo app.
Is it time to move on from PayPal?
There's no doubt about it: PayPal has some short-term headwinds. Analyst earnings forecasts for 2022 have been falling with consensus estimates down 17% from 90 days ago. Until PayPal beats estimates and raises guidance, it's unlikely to find a bottom.
Longer term, the company remains healthy, but it looks fairly priced with a price-to-earnings-growth ratio of one. Meanwhile, it's easy to find other stocks trading at a much deeper discount. Given how much the stock has fallen, I don't see the benefit in a long-term investor selling now, but I certainly wouldn't be adding to a position. For investors with no skin in the game, I'd suggest looking for value somewhere else.
