PayPal (PYPL 2.90%) posted its fourth-quarter earnings report on Feb. 7. The digital payment provider's revenue rose 9% year over year to $8 billion, which beat analysts' estimates by $130 million, while its adjusted earnings grew 19% to $1.48 per share and cleared the consensus forecast by $0.12 per share.
However, PayPal's stock stumbled after the report and remains more than 80% below its all-time high. Let's see why the bulls are staying away from PayPal -- and whether value-seeking investors should buy it as a turnaround play.
Image source: PayPal.
Why did the bulls retreat?
From 2015 to 2021, PayPal's revenue increased at a compound annual growth rate (CAGR) of 18% as its active accounts surged from 179 million to 426 million. Those robust growth rates drove its stock to its all-time high in 2021.
But in 2022, PayPal's revenue only rose 7% as its active accounts ticked up 2% to 435 million. In 2023, its revenue increased 8% as its active accounts shrank 2% to 426 million. As the following table illustrates, it shed accounts sequentially in each quarter of 2023 as its year-over-year revenue growth remained stuck in the high single digits.
|
Metric |
Q4 2022 |
Q1 2023 |
Q2 2023 |
Q3 2023 |
Q4 2023 |
|---|---|---|---|---|---|
|
Active accounts |
435 million |
433 million |
431 million |
428 million |
426 million |
|
Total revenue |
$7.4 billion |
$7.0 billion |
$7.3 billion |
$7.4 billion |
$8.0 billion |
|
Revenue growth (YOY) |
7% |
9% |
7% |
8% |
9% |
Data source: PayPal. YOY = year over year.
Several major challenges throttled PayPal's expansion. In 2018, eBay (NASDAQ: EBAY) replaced PayPal with its Dutch rival, Adyen (OTC: ADYE.Y), as its preferred payments platform in a five-year transition that ended in 2023.
PayPal experienced a temporary growth spurt during the pandemic as more people shifted toward digital payments, and that acceleration masked its gradual loss of eBay's revenue in 2020 and 2021. But in 2022, the digital payments market experienced a post-pandemic slowdown and its decoupling from eBay exacerbated that pressure. To make matters worse, inflation and rising interest rates broadly curbed consumer spending across many of its top markets.
Meanwhile, PayPal struggled to retain its users as Adyen, Block (NYSE: SQ), Stripe, Apple, Alphabet's Google, and other competitors carved up the fragmented digital payments market.
That slowdown convinced many investors that PayPal's high-growth days were over. For 2024, analysts expect PayPal's revenue to rise just 7% -- compared to a 24% increase for Adyen and a 13% jump for Block.
How is PayPal stabilizing its business?
PayPal its trying to offset its persistent loss of accounts by expanding its peer-to-peer payments platform, Venmo; increasing adoption of its buy now, pay later (BNPL) services; and securing more unbranded payment processing deals with big enterprise customers. That strategy boosts its average transactions per account, which offsets its ongoing loss of accounts and lifts its total revenue.
PayPal has also been reining in its spending to strengthen its adjusted operating margin. Its adjusted operating margin dropped from 24.8% in 2021 to 21.3% in 2022 but finally bounced back to 22.4% in 2023. As a result, its free cash flow (FCF) improved throughout most of the year as it pumped out double-digit EPS growth.
|
Metric |
Q4 2022 |
Q1 2023 |
Q2 2023 |
Q3 2023 |
Q4 2023 |
|---|---|---|---|---|---|
|
Adjusted operating margin |
22.9% |
22.7% |
21.4% |
22.2% |
23.3% |
|
Free cash flow |
$1.4 billion |
$1.0 billion |
($0.4 billion) |
$1.1 billion |
$2.5 billion |
|
Adjusted EPS growth |
11% |
33% |
24% |
20% |
19% |
Data source: PayPal.
CEO Alex Chriss, who took the helm last September, plans to maintain that balance of cutting costs and investing in new features. However, PayPal now expects its adjusted EPS to stay nearly flat in 2024 -- compared to analysts' expectations for 2% growth -- as the rising costs of expanding its ecosystem offset its recent layoffs and other cost-cutting measures.
During the conference call, Chriss warned that 2024 would be a "transition year" with a "minimal contribution" from its newest features, which include its streamlined checkout service FastLane, its Smart Receipts tool, and its Cash Pass rewards program. In other words, investors shouldn't expect PayPal's growth to accelerate until 2025.
Is it the right time to buy PayPal?
At $59 per share, PayPal's stock looks cheap at 12 times forward earnings. Block and Adyen trade at 23 times and 55 times forward earnings, respectively.
However, PayPal probably won't reignite its growth anytime soon, and it faces formidable competitive and macro challenges. Unless it meaningfully widens its moat and stabilizes its sales and margins, it will continue to trade like a value stock. So for now, I believe it's smarter to stick with higher-growth fintech plays like Adyen or Block instead of PayPal.
