This has been a challenging year for professionals and retail investors alike. The S&P 500 got off to its worst six-month start in 52 years, and growth stocks have taken the brunt of the hit.
PayPal (PYPL -0.41%) is one beaten-down growth stock that has dipped nearly 70% from its all-time high price set last year. The fintech has experienced slowing growth, and earlier this month, investors learned that activist investor Elliot Investment Management took a $2 billion stake in PayPal.
Hedge funds were buyers too. D.E. Shaw added 3.9 million shares, nearly doubling the hedge fund's position, and Ray Dalio's Bridgewater Associates added 1 million shares of the fintech. So if billionaires are buying PayPal, should you?
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PayPal was a pandemic winner, but growth is slowing
PayPal helps customers move money and was one of the earliest fintechs pushing the boundaries of payments into a digital era. The company was a big winner from the pandemic, which shifted consumer habits toward more online purchases. It also benefited from government stimulus, which helped boost consumer spending.
Over two years, through the end of 2021, it added 122 million new accounts and grew revenue 43%. This rapid growth was hard to sustain, and investors realized this earlier this year, when management tempered expectations.
After forecasting 2022 revenue growth of 18% last year, management lowered its estimate multiple times. First, it reduced growth expectations to a 15% to 17% range in January, and it lowered this projection again in April to a range of 11% to 13%.
The fintech trades near its cheapest valuation ever
With the normalization of economies and less government stimulus in the form of direct payments to consumers, it's challenging for PayPal to keep up the same growth rates. This has been a similar story for several other highfliers that reaped the benefits from the effects of the pandemic and related lockdowns.
However, PayPal is very beaten down, trading at a price-to-earnings (P/E) ratio of 53, which still puts it near its lowest valuation since it was spun off from eBay in 2015. Its forward P/E ratio, based on next year's earnings, is even lower at 19 and has the company in value stock territory.
PYPL PE Ratio data by YCharts
Why the second quarter could be the "low-water mark"
Chief Executive Officer Dan Schulman told investors that this most recent quarter would be the "low-water mark for the year." During the quarter, PayPal's net revenue was up 9%, but it posted a net loss of $341 million, its first quarterly net loss since going public. Active accounts remained little changed from the previous quarter and grew 6% from the same quarter last year.
Schulman made clear earlier this year that it would focus on customer engagement rather than adding more customers. During the quarter, transactions per active account were 48.7, up 4% from the previous quarter and up 12% from the same quarter last year.
PayPal's turnaround plan
In the first six months of the year, PayPal's revenue increased 8%, short of management's revised earnings estimates from April. Management's new revenue forecast for the whole year is $27.85 billion, representing growth of 9.7%. After reducing earnings expectations multiple times, Elliot Investment Management took a stake to help the company get the most from its business.
One of PayPal's first measures is to ruthlessly cut costs. By the end of the year, the company plans to cut $900 million and looks to cut a total of $1.3 billion in costs by next year. It plans to reinvest its savings into the high-conviction growth opportunities in its business to improve profit margins.
Billionaires have taken an interest in PayPal, and for good reason. The company remains a big player in the digital payment industry, and its engagement trends are moving in the right direction. While the fintech is undergoing growing pains, its moves to cut costs and unlock its high-value products could make this a stellar stock for long-term investors.
