PayPal's (PYPL 0.64%) stock rose 3% on Feb. 10 after it posted its fourth-quarter report. The digital payment company's revenue rose 7% year over year (9% in constant currency terms) to $7.4 billion and beat analysts' estimates by $10 million. Its adjusted earnings rose 12% to $1.24 per share and cleared the consensus forecast by $0.04.
Those growth rates look stable, but PayPal's stock remains down more than 30% over the past 12 months. Let's see why this fintech leader lost its luster, if its business is stabilizing, and if it can recover and outperform the market by the end of 2023.
Image source: PayPal.
What happened to PayPal?
PayPal generated robust growth during the pandemic as more people shopped online and used Venmo for peer-to-peer payments. In 2020, its revenue rose 21%, its total payment volume (TPV) increased 31%, and its adjusted earnings per share (EPS) grew 31%. It initially expected that momentum to last for a few more years.
During an investor day presentation in February 2021, CEO Dan Schulman boldly claimed that between 2020 and 2025, PayPal could nearly double its number of active accounts from 377 million in 2020 to 750 million, more than double its annual revenue to over $50 billion, and more than double its annual free cash flow (FCF) from $5 billion to more than $10 billion.
The bulls cheered and PayPal's stock skyrocketed to an all-time high of $308.53 on July 23, 2021. But as of this writing, it trades at about $80. Its stock plummeted for three reasons: Growth cooled off as economies reopened after pandemic lockdowns, inflation and other macro headwinds exacerbated the slowdown, and rising rates drove investors away from pricier tech stocks.
In 2021, PayPal's revenue rose 18%, its TPV climbed 33%, and its adjusted earnings grew 19%. But last February, it abandoned its goal of reaching 750 million active accounts by 2025 and warned that its growth would cool off in 2022. The final stages of its decoupling from eBay, which started a multiyear transition from PayPal to its Dutch rival Adyen in 2018, exacerbated that painful slowdown.
In 2022, PayPal's revenue grew just 8%, its TPV increased 9%, and its adjusted EPS dropped 10%. It ended the year with 435 million active accounts, which represented a mere 2% growth from the end of 2021. That's why it wasn't all that surprising when Schulman, who had led PayPal since 2014, announced that he would step down by the end of 2023.
Is PayPal's business stabilizing?
As the following table illustrates, PayPal's year-over-year growth in revenue, active accounts, and TPV all decelerated in the fourth quarter. During the conference call, Schulman blamed that slowdown on a "difficult macroeconomic environment" and sluggish e-commerce growth. However, its adjusted operating margin still expanded sequentially and year over year as it focused on cutting costs to offset that slowdown.
|
Metric |
Q4 2021 |
Q1 2022 |
Q2 2022 |
Q3 2022 |
Q4 2022 |
|---|---|---|---|---|---|
|
Revenue Growth (YOY) |
13% |
8% |
10% |
11% |
7% |
|
Active Accounts Growth (YOY) |
13% |
9% |
6% |
4% |
2% |
|
TPV Growth (YOY) |
23% |
15% |
13% |
9% |
5% |
|
Adjusted Operating Margin |
21.8% |
20.7% |
19.1% |
22.4% |
22.9% |
Data source: PayPal. YOY = Year over year.
For the first quarter of 2023, PayPal expects its revenue to rise 7% year over year (9% in constant currency terms) to $6.97 billion, and for its adjusted EPS to increase 23% to 25%. During the call, CFO Gabrielle Rabinovitch said the first quarter was "off to a great start and sets us up well for the year ahead."
For the full year, PayPal expects its adjusted EPS to rise 18%, compared to its prior guidance for 15% growth. It attributed part of that rosier outlook to more cost reductions and higher interest income, but a part of that boost will also come from the increased usage of stock-based compensation. That's a bit worrisome, because it implies its earnings growth will look a lot worse on a generally accepted accounting principles (GAAP) basis as it factors in those stock-based expenses.
PayPal declined to provide any full-year guidance for its revenue and active accounts, but it will start to report its growth with a new metric, monthly active unique users, this year. It ended 2022 with 190 million monthly active unique users. That only represented less than half of its "active" accounts, which are measured on an annual basis.
Where will PayPal's stock be in a year?
2023 could be another slow-growth year for PayPal, but its margins and earnings are stabilizing. At $80, it trades at 16 times its adjusted EPS forecast for the year, which makes it cheaper than many of its peers. Adyen trades at 58 times forward earnings, while Block trades at 44 times next year's adjusted earnings.
I believe PayPal's low valuation will limit its downside potential this year, but there's no reason for the stock to rally. Even if the macro situation improves, investors might flock to higher-growth plays like Adyen and Block before PayPal. Therefore, I expect PayPal's stock to trade sideways and underperform the broader market and its industry peers this year.
