PayPal Holdings (PYPL -0.16%) reported its fourth-quarter earnings results after the market closed Thursday, and the numbers were a bit disappointing. The company missed expectations on payment volume and user growth but met expectations for earnings per share.
However, the most important part of PayPal's earnings report might not be a number at all. Along with the earnings release, PayPal announced that CEO Dan Schulman plans to retire at the end of 2023. Here are the details of Schulman's announcement, the current state of PayPal's business, and what a change in leadership could mean for shareholders.
PayPal's CEO plans to retire
Dan Schulman became CEO of PayPal upon its spinoff from eBay in 2015 and has been in the top spot ever since. During his tenure (through the end of 2022), PayPal has added 254 million active users, grown its payment volume by more than 370%, and increased its annual free cash flow from less than $2 billion to more than $5 billion. And even though the stock has dramatically underperformed the market in the recent downturn, original shareholders have received a 114% total return under Schulman's leadership, about 11% annualized.
Schulman plans to stay on the company's board of directors but cited the desire to spend more time outside of work as a reason for his decision. He does considerable nonprofit work and has several other non-PayPal interests he'd like more time to pursue. And it's worth noting that Schulman is 65, so retirement isn't a huge surprise.
PayPal is planning to hire a search firm to help find the company's next leader, and Schulman says he is "100% committed" to working with his successor to ensure a smooth transition.
How is PayPal's business doing?
As mentioned, PayPal's latest results were a mixed bag. The number of active accounts at the end of 2022 was 435 million -- a massive total, but just 2% more than the fintech giant had a year ago.
On the positive side, payment volume reached $1.36 trillion. Although that wasn't as strong as analysts had hoped for, it was 11% more than a year ago (excluding the winding down of the eBay relationship). Person-to-person (P2P) payment volume declined by 2% year over year in the fourth quarter, which makes sense, as it is easier for people to pay each other in person than it was in late 2021 due to fewer COVID-19 restrictions.
The company has grown to be an absolute cash machine, generating $5.1 billion in free cash flow on $27.5 billion in revenue. PayPal is now accepted at 79% of the 1,500 largest retailers in North America and Europe, roughly three times the acceptance rate of its closest competitor.
Finally, PayPal is in excellent shape financially. It has $15.9 billion in cash and equivalents on its balance sheet, even after spending $4.2 billion on buybacks in 2022. The company anticipates 18% earnings-per-share growth in 2023 and roughly 75% of its expected $5 billion in free cash flow to be used for further share repurchases.
Could a change at the top be what PayPal needs?
Schulman has delivered impressive results as PayPal's CEO -- the numbers speak for themselves. However, he has also made some moves in recent years that didn't sit well with shareholders -- for example, the company considered acquiring Pinterest (PINS -1.09%) for over $40 billion at the height of the market, although where it would fit in PayPal's ecosystem was unclear. And a stock falling by as much as 80% from its highs can erode confidence in any leader.
Plus, it wasn't that long ago (2021) that Schulman said the company would have 750 million users by 2025, a target that he abandoned about a year later as the world gradually returned to normalcy and digital payments growth slowed.
While Schulman has been a great leader for PayPal, his decision to pass the torch could end up being a great move for investors if the right successor is put in place. While PayPal is a massive and profitable company, there's still quite a bit of room to grow in the payments market, with an estimated $185 trillion in global payment volume (PayPal accounts for less than 1% of this). A new, visionary leader could be just what the company needs.
