It's been a tough year for PayPal Holdings (PYPL 0.64%). After business boomed during the pandemic, the online payments specialist got hit with some challenges amid the macroeconomic uncertainty the pandemic left behind. At one point, the company warned about slowing sales. Then it reduced its revenue expectations for the year multiple times.
But CEO Dan Schulman recently offered another update on the company and told investors he believes the worst is behind the payments company. Let's look at what he had to say and why he might be right.
PayPal was a massive winner from pandemic-era policies
PayPal was a big beneficiary during the pandemic as more consumer spending was forced to rely on online payments. In 2020 and 2021, PayPal added 122 million new accounts to its platform, grew its revenue by 43%, and surpassed $1 trillion in total payment volume annually for the first time.
It was unrealistic to expect this elevated rate of growth to continue forever, and last November, PayPal guided for a more normal revenue growth rate of 18% for fiscal 2022. But since that initial projection, PayPal management revised its guidance downward multiple times, first in January and again in April, when it said revenue growth for the year would be between 11% and 13%.
All these revisions created some uncertainty, and investors hate uncertainty. PayPal's multiple downward revisions had investors wondering if there was more to come. In the summer of 2021, the stock hit a high point, trading at over $300 per share. This summer, the stock was trading down over 75% from that high.
PayPal faced some headwinds in the past year
PayPal has had a few challenges that put pressure on its earnings over the last year. For one, eBay ended a long-running agreement that had PayPal as its default payments provider and migrated away from the platform to its own managed payments system. That put $2.4 billion in revenue pressure on PayPal over the last four to five quarters, according to Schulman. Second, consumer spending habits became hard to predict. Amid the pandemic, consumers spent a significant amount on e-commerce. Figuring out how much of this trend was permanent was a challenge. Lastly, consumers have had to deal with inflationary pressures in the post-pandemic world.
In the second quarter, PayPal's net revenue grew 9% year over year, but it posted its first net loss since 2014. Schulman said he was optimistic about the company and believed its second-quarter earnings would be the "low-water mark for the year."
Image source: Getty Images.
Here's why PayPal investors can feel optimistic
During a presentation earlier this month at Goldman Sachs, Schulman told the audience that the company was having a "good solid [third] quarter," that revenue was in line with the company's guidance, and that earnings per share (EPS) might come in stronger than expected. He said it is difficult to make projections in this uncertain economy but that "we finally got the guidance right, and we're executing against that."
PayPal is working to get back on track by fiercely cutting costs. The company plans to cut $1.3 billion in costs over the next two years, with $900 million in cost savings this year alone. It then plans to reinvest these cost savings into high-conviction, high-margin growth opportunities.
Schulman mentioned that PayPal would focus on areas where it can take market share, including with its Checkout, PayPal and Venmo digital wallet, and Braintree. Checkout is the core of PayPal's business, with 35 million active merchant accounts and 400 million active consumer accounts.
Braintree is another payment system integrated into PayPal. It allows merchants to accept Automated Clearing House (ACH) direct debit, digital wallets (even those outside of PayPal), and other payment types. Merchants prefer it because it caters to higher-volume e-commerce businesses that want control over the payment process. Braintree has a 50% compound annual growth rate over the past three years. By focusing on these products, management believes it could drive operating-margin expansion beginning in the fourth quarter this year and into 2023.
PayPal stock looks cheap at today's prices
PayPal stock currently trades at a price-to-earnings (P/E) ratio of around 52.9, but its one-year forward P/E of 19.2 makes it look much cheaper. The stock trades near its lowest valuation since it was spun off from eBay in 2015, attracting several billionaire investors' attention. In August, we learned that the activist investor Elliott Investment Management took a $2 billion position in the payments company.
While macroeconomic conditions continue to weigh on the economy and stock market, it's encouraging to see that PayPal is dialing things in and revamping the business to focus on its highest-conviction products. At $95 per share as of Sept. 19, the stock is still down nearly 71% from its peak price and looks like it could be an excellent value for investors.
