Many companies in the fintech industry have been hit particularly hard in the recent stock market downturn. PayPal (PYPL 0.14%) is one major example, with shares down by nearly 75% from their recent highs.
Despite the poor stock performance, it's important for investors to realize PayPal's business is still doing quite well -- it's growing and generating billions of dollars in profits annually. Here's a rundown of the major concerns investors have about PayPal and why I decided to finally add the stock to my own portfolio recently.
Why has PayPal been so beaten down?
There have been some negative catalysts so far this year that have pushed PayPal stock lower. Its fourth-quarter 2021 and first-quarter 2022 earnings reports both showed user growth that came in significantly short of expectations, and the company has essentially conceded that its growth target of 750 million users within a few years (current user count: 429 million) is unlikely to happen.
There are also recession fears and a concern about a general slowdown in consumer spending, which could impact the fintech giant's business in a few ways. Lower consumer spending means lower transaction volume. Plus, a recession usually brings an uptick in consumer loan defaults, and PayPal has a rather large buy-now-pay-later business.
An incredible business that should weather the storm just fine
Make no mistake about it: PayPal is a fantastic business. It has 429 million active accounts between its namesake and Venmo platforms, and processes over $1.2 trillion in annual payment volume. And despite what the stock price might suggest, growth hasn't exactly come to a stop.
In fact, PayPal's total payment volume increased 15% year over year in the first quarter, and that's on top of the pandemic-fueled gains of the comparable 2021 period. Revenue rose 8%, and the average user is making 11% more transactions on the platform than they did a year ago. And while a 9% annualized growth rate in active accounts is certainly lower than we've seen in recent years, it isn't really a cause for alarm.
PayPal's business is also very profitable, with more than $5 billion in free cash flow expected in 2022. This, along with about $8 billion in cash and short-term investments on the balance sheet, gives PayPal superior financial flexibility to invest in its own growth, make strategic acquisitions or investments, or potentially buy back its own shares if it perceives a discount to intrinsic value.
A market leader at its cheapest valuation ever
When it comes to online payments, there's PayPal, and then there's everyone else. The company is the clear payment volume leader, and it continues to grow its business (although not as fast as in recent years). In addition, the stock is trading for its lowest valuation on a price-to-sales basis since it spun off from eBay in 2015. While the stock might remain volatile for some time, now seems like an excellent opportunity for patient long-term investors to add this market leader to their portfolios at a discount.