The current environment is negative for tech stocks. The rising interest rates make capital more expensive, while inflation reduces the consumer's ability to buy companies' products. Such factors have sent tech stocks plummeting, and fintech pioneer PayPal (PYPL 0.73%) didn't escape the trend.
Nonetheless, PayPal's business model could actually benefit from current conditions. Here are three reasons why.
1. PayPal's transaction-based revenue stream
PayPal likes to talk about its extensive ecosystem encompassing dozens of products serving both consumers and merchants. However, for all of the focus on new offerings, transactions have made up 92% of PayPal's revenue so far this year.
Investors should note that for most transactions, PayPal charges users a percentage of the transaction value. Hence, the more expensive transactions, driven by inflation, should increase the company's revenue.
During the bear market, Paypal has continued its revenue growth. It reported $13.3 billion in revenue for the first half of the year, growing only 4%, versus the same time frame in 2021. This is significantly slower than the 18% revenue growth in 2021.
Nonetheless, CEO Dan Schulman described Q2 as a "low watermark" for the company. Management forecasts around 10% revenue growth for 2022. Schulman reiterated these forecasts recently, saying he expects revenue to meet or exceed expectations for a third-consecutive quarter. This indicates that revenue growth could soon approach 2021 levels.
2. Couponing in PayPal
In addition to transactions, PayPal can also help consumers find discounts. With inflation still above 8%, cash-strapped consumers need ways to save money. This should play into the hands of PayPal's couponing app Honey, which PayPal acquired in early 2020.
Honey benefits consumers by searching for what it deems the best coupons on the internet for a particular consumer, based on individual tastes. It works with more than 30,000 merchants to find discounts and bring them to interested consumers.
This also plays into PayPal's current strategy. After Q4, PayPal switched its emphasis from acquiring new customers to increasing engagement with the platform. Because of Honey, consumers have one more reason to search a PayPal-supported app and spend more through its site, a move that should increase the average revenue per user (ARPU).
3. PayPal's valuation and earnings
Nonetheless, investors haven't warmed up to this new focus. When PayPal announced in February that it would focus more heavily on ARPU than attracting new users, it lost one-fourth of its value in the next trading day. It would fall significantly further before staging a partial recovery. As a result, it has dropped by nearly 70% from its all-time high in August 2021.
Although the drop was painful for long-term investors, it now presents a unique opportunity for new investors in the fintech stock. Its price-to-sales ratio has fallen to just above four, taking the sales multiple almost to record lows.
PayPal's recent earnings likely bear some of the blame for the decline. It reported a Q2 loss of $341 million, leading to only $168 million in net income for the first half of the year, 93% less than in the same period last year. The company blamed rising transaction expenses related to the e-commerce payment-platform Braintree. Higher transaction and credit losses with a Venmo service offering also contributed to the higher expenses.
Despite this challenge, billionaires can't stop buying the company, including activist investor Elliott Management. Given Elliott's history, this likely means that PayPal could get some help in reducing these heightened expenses so profitability can recover.
Consider PayPal stock
Tech investors should take a closer look at PayPal stock. While not immune to a slowdown, its transaction-based revenue model and focus on couponing should insulate PayPal and its users from inflationary effects.
Despite Q2 losses, the company will likely receive help from Elliott as revenue continues to rise. These factors should bode well for PayPal over the long term, regardless of what happens with inflation.