As an early pioneer of the financial technology (fintech) industry, PayPal Holdings (PYPL -0.86%) has rewarded its shareholders in fantastic style since spinning off from eBay in July 2015. Even after plunging 66% in the past year, shares of the mobile payment leader are still up about 160% all-time. As evidenced by its latest stock price movement, however, the company has hit a roadblock in recent quarters.
Unlike the vast majority of fintech businesses today, PayPal has historically been a profit-generating machine. That changed in its second quarter -- the mobile payment company suffered a net loss under generally accepted accounting principles (GAAP) for the first time since the first quarter of 2014. That's an eye-opener, to say the least, and certainly something investors should closely monitor over the next few quarters. In the end, will the fintech giant bounce back or are its best days in the past?
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A second quarter (not) to remember
PayPal's stock has surely been a victim of the broader tech sell-off related to high inflation and rising borrowing costs, but the fintech company is facing problems of its own. In its second quarter, the company reported a net loss of $341 million, a drastic swing from its $1.2 billion profit in the same quarter a year ago. Fortunately, it generated a positive operating profit of $764 million, though it did decline 32.2% year over year. So, what happened?
Two of PayPal's operating expenses, transaction costs and transaction and credit losses, experienced significant upticks from a year ago. The company's transaction expense grew 21% year over year to $3 billion, equal to 45% of total sales. Management traced the rise to Braintree, a mobile card payment system for e-commerce businesses. Braintree, which PayPal acquired in 2013, generally has higher expenses than the fintech's other services. To boot, management mentioned a shifting funding mix -- specifically more normalized debit card usage compared to last year -- for the increased transaction expense as well. The company's transaction and credit losses also rose 165% year over year to $448 million due to an ongoing insolvency proceeding and fraud schemes related to its Venmo service offering.
How does PayPal plan to fix its problems?
Although investors should closely watch the company's expense and profit situation in the coming quarters, I think PayPal will bounce back. In its second-quarter earnings call, management was very clear about plans to cut operating costs. Chief Executive Officer Dan Schulman talked about leveraging its scale to drive cost reductions across its supplier base. The company has also reduced its workforce and plans to shift its real estate footprint by hiring employees in lower-cost locations.
As a result, the fintech leader believes it can realize its $900 million savings target across operating and transaction expenses in 2022. It also believes its initiatives will allow for $1.3 billion in savings in 2023. While execution is much different than planning, it's clear that PayPal is prioritizing cutting costs and increasing profits in the coming years. It will be interesting to watch how the company's cost-saving plans pan out, but it looks like the company is heading in the right direction.
Should investors buy PayPal stock?
I believe PayPal will rebound mightily. Not only is the fintech leader well positioned with 429 million active users and a cash and short-term investments position of $9.3 billion, but I love where management's head is with its ambitious cost-cutting plans. At a forward price-to-earnings ratio of a little more than 20 and a price-to-sales multiple of 4.3, PayPal stock appears to have reached a fine entry point for long-term investors.
Over the past five years, the fintech stock has pegged a mean price-to-earnings ratio of 57.2 and a price-to-sales multiple of 8.8. But regardless, I believe PayPal's rich history of profitability will continue for years to come, and long-term investors should feel confident that the stock will generate market-beating returns.
