Digital payments pioneer PayPal (PYPL 0.47%) posted third-quarter revenue of $6.8 billion (up 11% year over year) and adjusted earnings per share (EPS) of $1.08 (down 2%) that both beat Wall Street analyst estimates. And the shares are up about 9% since the announcement on Nov. 3.
But despite the recent positive performance, the fintech stock is down 54% in 2022, worse than the S&P 500's 17% drop this year. Investors might be eyeing PayPal as a potential recovery play in 2023. Here's why the stock might be ready to bounce back -- and not just next year, but over the long term.
Looking at the macro environment
PayPal's business was firing on all cylinders throughout 2020 and 2021 as e-commerce and electronic payments took off thanks to the pandemic forcing people to spend more time at home, leading to a change in shopping behavior. But unsurprisingly, PayPal is starting to experience a slowdown as consumer return to past shopping patterns. The company's user base, now at 432 million, is up just 4% from the third quarter last year. This was after the business gained a total of 121 million active accounts in 2020 and 2021. PayPal is only expected to add about 9 million net new active accounts this year. Because of this, the management team, led by Chief Executive Officer Dan Schulman, walked back its goal of hitting 750 million active accounts by 2025.
Even with the slowdown, PayPal still processed a whopping $337 billion in total payment volume (TPV) in Q3, good for a 9% year-over-year jump. And the business remains the top online wallet in North America and Europe, with a presence at 76% of the 1,500 largest merchants in these two regions. That's a powerful position to be in any way you look at it.
PayPal's financial performance in 2023 depends largely on the macroeconomic environment. According to the management team, the transactions that take place on the platform lean toward discretionary purchases. And these things can be put on hold when the economy worsens and budgets are tight.
"We're operating in an environment where we think we're going to continue to have inflationary pressures, where real wage growth is going to continue to be negative for a period of time, where discretionary spend will be under pressure," Chief Financial Officer Gabrielle Rabinovitch said on the Q3 2022 earnings call with analysts.
Inflation, as measured by the widely followed consumer price index, rose 7.7% in October from a year ago, a lower-than-expected increase. This could be a sign that the Federal Reserve's policies are working, and the central bank may decide to slow the pace of interest rate hikes in the near future. This scenario certainly has the potential to spur economic growth in 2023.
And PayPal should be a beneficiary if the economy starts to show signs of strengthening. Consumers will be inclined to spend more on discretionary purchases, which would result in higher transaction revenue for the business. In the third quarter the average active account on the platform did 50.1 transactions during the trailing 12-month period, up 13% versus the year-ago period.
Although management hasn't yet provided 2023 forecasts for TPV and revenue, the team predicts EPS to rise 15% next year. The consensus estimate from Wall Street analysts is 17.4%. If either target is achieved, especially the way the economy is right now, it would be a positive result.
Focus on the long term
In my opinion, true investing means looking out over the next five to 10 years. With this outlook in mind, it's obvious that trying to predict what happens in any single year is not only difficult, but isn't all that important in the grand scheme of things.
Yes, PayPal's stock has been decimated this year. However, it's worth keeping in mind the huge opportunity the company is attacking. According to data from Digital Commerce 360, e-commerce shopping in the U.S. accounted for roughly 21% of all retail sales in the April-through-June period. This suggests there's a lot of untapped potential for PayPal's future growth.
The likelihood of PayPal's share price experiencing a bull run in 2023, or a 20% gain, is anyone's guess. This is because it not only depends on the state of the economy, which no one can predict accurately, but also on market sentiment, which is again something that's not knowable ahead of time. If you believe in the long-term outlook for PayPal, then buying beaten-down shares now could be a great idea.
