PayPal Holdings' (PYPL 1.57%) stock price popped 9% on Aug. 3 after the digital payments company posted its second-quarter results. Its revenue rose 9% year over year (10% in constant currency terms) to $6.81 billion, beating analysts' expectations by $20 million. Its adjusted net income fell 21% to $1.08 billion, or $0.93 per share, which still topped estimates by six cents.
PayPal cleared those low bars, but has its stock finally bottomed out after losing nearly two-thirds of its value over the past 12 months? Let's review the key numbers to see if this stock is worth buying again.
Image source: PayPal.
What happened to PayPal?
PayPal made two big mistakes over the past year. First, it experienced robust growth during the pandemic as more people made online purchases, but it failed to prepare for the subsequent post-pandemic slowdown, which was exacerbated by the loss of its longtime partner (and former parent company) eBay (EBAY 0.19%) to its European rival Adyen (ADYE.Y 0.30%). eBay signed on with Adyen in 2018 and finished moving most of its sellers to its platform last year.
Second, PayPal overpromised and underdelivered. During an investor day presentation last February, PayPal claimed it could nearly double its active accounts from 377 million in 2020 to 750 million in 2025. But this February, it abandoned that goal and said it would focus on boosting its average revenues per user with new features instead.
The abrupt departure of its longtime CFO John Rainey in May raised additional red flags, and investors grew increasingly concerned about PayPal's ability to keep growing as inflation throttled consumer spending. Rising interest rates also made its high-flying stock -- which traded at nearly 70 times its adjusted earnings in 2021 last July -- a lot less appealing.
NASDAQ: PYPL
Key Data Points
Its growth is still decelerating
PayPal's number of active accounts rose 6% year over year to 429 million in the second quarter. Its total payment volume (TPV) grew 13% to $339.8 billion, and its total transactions increased 16% to 5.51 billion. However, all three key growth rates have decelerated significantly over the past year.
|
Period |
Q2 2021 |
Q3 2021 |
Q4 2021 |
Q1 2022 |
Q2 2022 |
|---|---|---|---|---|---|
|
Active Accounts Growth (YOY) |
16% |
15% |
13% |
9% |
6% |
|
TPV Growth (YOY) |
36% |
24% |
23% |
15% |
13% |
|
Transactions Growth (YOY) |
27% |
22% |
21% |
18% |
16% |
|
Revenue Growth (YOY) |
17% |
13% |
13% |
8% |
10% |
Data source: PayPal. YOY = Year over year. Constant currency basis.
On the bright side, PayPal's year-over-year revenue growth accelerated for the first time in five quarters as the expansion of its peer-to-peer payments app Venmo offset the slower growth of its namesake services. Venmo ended the second quarter with nearly 90 million active accounts, compared to 52 million active accounts at the end of 2019. Lapping the stimulus-induced spending last year and almost completely decoupling from eBay -- which only accounted for 2.5% of its revenue in the second quarter -- also contributed to the stabilization of PayPal's top-line growth.
PayPal's guidance suggests that stabilization will continue. On a constant currency basis, it expects its third-quarter revenue to rise 12% year over year and for its full-year revenue to increase 11% to $27.85 billion. It also expects to add 10 million new active accounts for the full year.
Its margins are still being squeezed
PayPal's top-line growth is stabilizing, but its adjusted operating margin declined both sequentially and year over year to 19.1% in the second quarter.
|
Period |
Q2 2021 |
Q3 2021 |
Q4 2021 |
Q1 2022 |
Q2 2022 |
|---|---|---|---|---|---|
|
Adjusted Operating Margin |
26.5% |
23.8% |
21.8% |
20.7% |
19.1% |
Data source: PayPal.
Part of that year-over-year decline can be attributed to tough comparisons to its release of credit reserves throughout 2021, but it was also exacerbated by higher investments in its digital wallet, e-commerce, cryptocurrency, and buy now, pay later (BNPL) services.
PayPal expects its adjusted EPS to decline 14% to 15% year over year in the third quarter and to fall 14% to 16% for the full year. That outlook seems grim, but PayPal expects its operating margins to expand again in the fourth quarter of 2022 and throughout 2023 as it reins in its spending and prioritizes its "highest conviction growth opportunities" (checkout services, digital wallets, and its Braintree backend software). It also hired a new CFO, Blake Jorgensen, to lead those cost-cutting efforts.
PayPal also authorized a fresh $15 billion stock buyback, including about $4 billion to be deployed this year, to back up its confident outlook. During the conference call, CEO Dan Schulman said he expects the pace of its buybacks to "remain aggressive" because he believes "there's currently a unique and attractive opportunity to return capital to our shareholders."
Is it finally safe to buy PayPal?
At $100 per share, PayPal trades at about 26 times this year's adjusted earnings. That's a reasonable valuation, but it's not a screaming bargain yet. I believe PayPal's taking a few steps in the right direction, but I'd like to see a few quarters of solid progress -- instead of more ambitious promises -- before I consider betting on its long-term turnaround.
