What happened
Shares of PayPal (PYPL -1.67%) plunged by 63.5% in 2022, according to data provided by S&P Global Market Intelligence.
The drop was not surprising as the technology-heavy Nasdaq Composite index had fallen by a third, registering one of its worst years in history.
Image source: Getty Images.
So what
Investors were spooked by PayPal's financial numbers for its third quarter of 2022 as they saw evidence of growth slowing drastically for the payments company. Net revenue had risen 11% year over year while total payment volume (TPV) grew 9% year over year. Just a year prior, revenue had grown by 13% year over year with TPV jumping by 26% year over year. It didn't help that PayPal's first- and second-quarter numbers also disappointed, with the company posting revenue growth of just 7% and 9% year over year, respectively.
Not only was the slowdown in TPV growth painfully obvious, but PayPal also added far fewer net new accounts (NNA) than in the previous year. CEO Dan Schulman has pivoted to focusing more on "high-quality NNAs" that are more profitable rather than blindly adding new users. The company added an impressive 48.9 million NNAs back in 2021 but only expects around 8 million to 10 million to be added for the whole of last year. The company also drew flak for laying off employees during the year in an attempt to lower its overhead costs.
Now what
With investors firmly focused on the bad news, it's easy to miss out on noteworthy highlights. For Q3 2022, PayPal generated its highest organic quarterly free cash flow in history and expects to repurchase a total of around $4.2 billion of shares. Recall that PayPal is shedding its reliance on eBay and that revenue growth ex-eBay for 2022 is expected to come in at around 13% year over year net of foreign currency movements.
The slowdown in TPV and NNA growth should also be a temporary one as online activity remains elevated post-pandemic and hybrid work and e-commerce look set to be the new normal. During its Investor Day back in 2021, PayPal highlighted that it has a total addressable market of around $110 trillion, representing a massive opportunity for the payments company to tap into for future growth. The company is also advancing on other initiatives such as refining its branded checkout experience to improve customer engagement as well as introducing a rewards program for U.S. customers to encourage usage of its digital wallets. What's more, Amazon and PayPal have teamed up in a partnership that offers the latter's Venmo digital wallet as a payment option for Amazon purchases.
Such collaborations, along with the opportunity to tap into the long-term growth in online transactions, should lead to a gradual recovery for PayPal this year. The momentum may be slow initially as the company is still rightsizing its workforce and laying down parameters to ensure profitable NNA acquisitions, but its prospects, in the long run, look decidedly bright.
