PayPal (PYPL 2.90%) benefited greatly from the coronavirus pandemic -- growing active accounts, total payment volume (TPV), revenue, and earnings at impressive rates. Consumers flush with cash and spending a lot of time at home turned to online shopping, boosting the digital payments giant.
At its all-time high, the stock was up a remarkable 740% from its July 2015 spinoff from eBay.
Like many pandemic darlings, however, PayPal is facing a slump as consumer behavior normalizes. The uncertain economic environment isn't helping the situation, either. This top fintech stock is currently down 79% from its peak price -- and growth has slowed dramatically.
Decelerating gains aren't a reason to panic on their own. But there was one glaring warning sign in PayPal's latest earnings report that deserves some attention. Here's what investors need to know.
Shrinking user base
During the first three months of 2023, PayPal reported revenue of $7 billion and diluted earnings per share of $0.70, both figures that beat Wall Street estimates. That was a positive sign, but there's more that investors should know beneath the surface.
The business ended the quarter with 433 million active accounts. While this was up 1% from a year ago, it was a decline of 1.5 million from just three months prior. This is a tiny number in the grand scheme of things, but it's a far cry from the monster growth registered over the past few years. In 2020 and 2021, PayPal added a total of 122 million net new accounts. And last year, it added 8.6 million.
For a company whose success depends on its users actually transacting on the platform frequently, having fewer customers makes it more difficult to keep that TPV figure rising going forward. And this could hurt revenue growth.
This could be a huge problem
I think shareholders could interpret this in different ways. For one, PayPal, which already has a huge user base, could be close to reaching a plateau in terms of growth. CEO Dan Schulman once set a target of hitting 750 million active accounts by 2025, probably influenced by the impressive pandemic gains.
He since took back that goal once growth started to slow. Maybe this downgraded forecast is finally starting to play out, as evidenced in the latest quarter's results. In fact, interim CFO Gabrielle Rabinovitch said that the business doesn't expect active accounts to increase in 2023.
Moreover, PayPal faces stiff competition from the likes of Shopify and Block's Square on the merchant side and from Apple Pay and Cash App on the consumer side. Customers have numerous compelling options to choose from in terms of digital payment providers. Is PayPal becoming just another commoditized payments offering?
This could be nothing to worry about
On the other hand, this could just be something more temporary in nature. Management has mentioned before that PayPal's network leans toward discretionary purchases. Although inflation has been cooling in recent months, it has been a huge issue on consumers' minds. With more spending going toward essentials, there's less disposable income that can go toward nice-to-have items.
And with e-commerce spending leveling off after a pandemic surge, PayPal has been dealing with the headwind of pressured online shopping. But the leadership team is optimistic that this area will show signs of life in the near term.
The bright spot is that transactions per active account keep rising at a healthy clip, up 13% in Q1 on a year-over-year basis. This is something the outgoing CEO has been emphasizing. "These results strongly reinforce our decision to focus our resources on engagement and driving high-value accounts," Schulman said on the Q1 2023 earnings call.
So, while PayPal's user base might be shrinking, the activity on its platform remains strong. I believe it's too early for shareholders to panic just yet. But trends with active accounts should be monitored closely over the next few quarters.
