In 2022, PayPal (PYPL -1.14%) processed just under $1.4 trillion in total payment volume, good for a 9% year-over-year increase. Revenue was up 8%, with free cash flow rising 4% versus 2021's production. And as of Dec. 31, the business counted 435 million active accounts, up 43% from the end of 2019, prior to the onset of the pandemic.
Despite what appear to be very favorable trends from this digital payments pioneer, especially during uncertain economic times, I'm in no hurry to buy the stock right now. Here's why.
Facing a notable slowdown
Higher inflation is hurting the spending ability of consumers, and PayPal feels this pain directly. Its focus on e-commerce transactions means that its customers typically utilize the payment service to buy nice-to-have items, as opposed to basic necessities. "Our revenue growth is highly correlated to discretionary e-commerce spending in our core markets," CFO Gabrielle Rabinovitch mentioned on the fourth-quarter 2022 earnings call. This type of spending has slowed down, according to management.
To be fair, no company is fully insulated from the whims of the economy, but PayPal's focus on discretionary purchase activity adds unwanted exposure. In addition to inflationary pressures, consumer behavior as it relates to spending is still changing. That's why PayPal didn't give full-year sales guidance.
It's also worth mentioning that CEO Dan Schulman, who is set to retire at the end of this year, took back his prior target of PayPal reaching 750 million active accounts by 2025. With the business only adding 8.6 million net new active accounts last year, there simply might not be as large of an expansionary runway for PayPal as shareholders had originally hoped.
Besides its lead in digital payments, PayPal bulls might point to the other services that the business offers consumers, like bill pay, direct deposit, shopping rewards, and the ability to buy stocks and cryptocurrencies. This is all well and good, but there are numerous other fintech companies, as well as incumbent financial services firms, providing the same kinds of services. This makes it hard for PayPal to differentiate itself in these areas.
How do you like them apples?
Another key factor giving me pause about owning PayPal is the emergence of Apple (AAPL 0.52%) Pay. Launched in 2014, this service is now becoming a formidable opponent to PayPal's dominance in the space. According to Statista, Apple Pay could generate $4 billion in revenue this year, up from less than $1 billion in 2019. That's massive growth indicative of this service's rapid adoption.
Apple is in a powerful position because of its 2 billion active devices worldwide. And given that iPhone users are generally higher-income consumers, it immediately gives the company a valuable customer base who can be lucrative Apple Pay users. With surging usage during the holidays and the introduction of a buy now, pay later offering, this should be on PayPal investors' minds. Anytime a business finds itself going head-to-head with a tech giant, particularly one as cash-rich and consumer-obsessed as Apple, there are always reasons to worry.
From my personal experience, I find myself checking out primarily with Apple Pay when shopping online. And in person, Apple Pay is really the only way I check out at a store. The fact that an iPhone is also doubling as a consumer's wallet benefits Apple because its Apple Pay service will always be prioritized. Moreover, I mainly use PayPal's peer-to-peer Venmo service to pay or receive money from friends, and because it is linked to my checking account, the company makes no money from these transactions. I suspect a lot of my friends are in the same boat when it comes to this type of behavior.
PayPal is a stock that might be in many readers' portfolios, but there are some tangible risks to keep in mind, most notably Apple's bigger foray into the payments industry. Additionally, the threat of a looming recession is something to keep in mind throughout 2023. As a result, I'm really in no hurry to buy shares right now.
