Digital payments giant PayPal (PYPL 2.90%) recently reported its 2022 third-quarter financials, posting revenue of $6.8 billion and adjusted earnings per share (EPS) of $1.08, both of which exceeded Wall Street forecasts. Nonetheless, the stock fell after the announcement thanks to a disappointing Q4 revenue forecast, as the market tends to care more about the outlook than past numbers.
PayPal has historically been able to post greater than 15% annual sales growth like clockwork, but with a slowdown imminent, is this still a top growth stock for investors to buy? Let's take a closer look at the fintech pioneer.
Recent results
During the three-month period that ended September 30, PayPal added 2.9 million net new active accounts, bringing the total to a whopping 432 million. And these users are engaged, as the number of transactions per account (over the trailing 12-month period) was 50.1, up 13% year over year. Total payment volume, a key metric that investors should follow, came in at $337 billion in the quarter, a gargantuan amount.
What's more, PayPal continues to show how profitable it is, increasing free cash flow 37% from the prior-year period to $1.8 billion.
PayPal also announced a new strategic partnership with tech giant Apple that will allow the fintech company's merchants and consumers to utilize Apple Pay at checkout in various ways. This follows another potentially lucrative tie-up for PayPal. By Black Friday, Venmo users will be able to shop on Amazon's website using their Venmo balances.
These announcements help to make PayPal's offerings even more ubiquitous in a hyper-competitive payments market, something that could support higher revenue over time.
Investors should wait
Despite the generally positive news that I just discussed, PayPal is facing macroeconomic headwinds, as is nearly every other business out there. High inflation deters consumers from spending like they did in 2020 and much of 2021. And because the activity on PayPal's platform leans toward discretionary purchases, the company could be severely affected in a recession. This also means slowing transaction revenue, which is PayPal's bread and butter, accounting for 91% of total revenue in the third quarter.
Besides the external issues facing PayPal, the business also has some internal problems that investors should be aware of. Not too long ago, Dan Schulman, PayPal's chief executive officer, walked back the company's ambitious goal of having 750 million active accounts by 2025. The goal now is to focus on adding higher-value users who will transact much more, a move that makes strategic sense, but which will limit the business's account growth. Management is expecting to end 2022 having added 8 million to 10 million net new active accounts in the year, a substantial decline from past years.
Plus, while the Amazon and Apple partnerships might help, Venmo is still being under-monetized. PayPal says that the peer-to-peer payments service counts 90 million active customers. And Venmo is forecasted to increase revenue 40% this year to nearly $1.3 billion, compared to $900 million last year. That might be impressive in a vacuum, but looking at a rival provides insights.
Block's Cash App, which competes directly with Venmo, provides an apt comparison. Cash App counted 49 million monthly active users in the latest quarter, but generated $774 million in gross profit in just the latest three-month period. It's safe to say that Venmo has some catching up to do when it comes to achieving better monetization.
For the full year, PayPal's management did raise EPS projections from $3.92 (at the midpoint) to $4.08 (at the midpoint), calling out benefits from cost savings and the release of credit loss reserves. But Q4 revenue is expected to come in lighter than what Wall Street was hoping at less than $7.4 billion, good for a 10% gain from the prior-year fourth quarter.
With PayPal's stock down 54% in 2022, the shares now trade at a forward price-to-earnings multiple of about 17. This is a compelling valuation, given that from 2016 through 2021 the company's revenue and net income increased 134% and 198%, respectively.
However, considering the state of the economy right now, coupled with problems specific to PayPal, it's probably best for investors to wait until things show signs of improvement before buying the stock.
