Summary
I expect there may be a few holes in the wall for PayPal investors.
PayPal continues to demonstrate superb consistency and growth.
PYPL stock price got ahead of itself and is now fairly valued again.
As I like to say, a picture is worth a thousand words, but a chart is worth a thousand pictures.
JasonDoiy/iStock Unreleased via Getty Images It’s been a brutal run for PayPal ( PYPL ) investors. The stock has crashed 70% in less than a year. Yikes.
Let’s be honest; the stock was overvalued. It was caught up in the growth frenzy following the COVID crash, benefiting from temporary boosts in e-commerce spending, and investors were excited about the company getting involved in crypto. PayPal announced its intention to get into crypto in June 2020 and confirmed their new business venture in October 2020. This fueled the stock price rally to generous valuations. Data by YCharts Today the stock has plummeted back to Earth, coinciding with a consolidation in crypto. The situation reminds me of a scene from the NBC Show The Office (U.S.) when Andy Bernard freaks out, punches a wall, and realizes how much he overreacted. Enjoy: Fret not, my disheartened compeers. All is not lost.
I see value in PayPal at these prices. The company dominates its market and appeals to the next generation of consumers. Short of a recession, which I think is a distinct possibility, the company will perform handsomely. That’s why I’ve started buying. PayPal Stock Is Falling, But The Sky Isn’t
I want you to take a moment and absorb the following chart. Really pause, take a deep breath, sit back in your chair and stare at it. Chart by Author (Data from Seeking Alpha) And the company expects to earn $6 billion in FCF in 2022 which averages $1.28 FCF per share per quarter. Now, that feels better, doesn’t it?
Let’s begin with a realistic examination of the immediate headwinds that PYPL is facing. The main issue has been the loss of eBay customers as the merchant is now able to process payments on its own platform. This is having an outsized impact on the company’s top line to the tune of $1.4 billion.
The company expects a further impact of $400 million in Q1 2022 and $200 million in Q2 2022. They are also expecting a higher tax rate in 2022. Consequently, management is guiding for $0.50 of GAAP EPS in Q1 2022 which is a 45% drop YoY. That’s just not good. Data by YCharts The good news is that eBay only accounts for 3% of PYPL’s current Total Payment Volume (TPV) and revenue. PayPal can only lose eBay once and they are nearly past this transition. Revenues excluding eBay have been growing at 25% CAGR. Company Q4 2021 Investor Presentation The company had a strong 2021 performance with revenues growing by 18% and non-GAAP EPS growing by 19%. Management expects to grow revenues by 15-17% in 2022. During the year PYPL added 49 million net new active accounts. Management is expecting to add 15-20 million new accounts in 2022. About 45% of active accounts are outside the U.S.
The company is shifting its focus toward higher margin accounts through greater engagement. This is what CFO John Rainey said during the Q4 earnings call: By virtually any measure, we are a market leader in digital payments and will continue to grow faster than the market. There are very few companies of our size with our global reach with our growth rates and cash generation. But we’re in a dynamic industry and one that is constantly evolving, even more so because of COVID. And we are evolving with it. Notably, our strategy as it pertains to engagement and net new actives. And even with the broad diversity of our business, we are not completely insulated from macroeconomic factors that while maybe impacting short-term performance have nothing to do with a long-term intrinsic value of our business. This is what CEO Dan Schulman said on the subject: …We are shifting our emphasis more towards engagement and towards driving higher value NNAs. Consumers who are more engaged drive incremental sales for our merchants and they drive growth at much higher margins and ROI. Growth in transactions per account (TPA) has been increasing over the last four quarters. TPA was up 11% in Q4. PayPal Q4 2021 Investor Presentation PYPL’s total payment volume (TPV) rose 38% 2021. This was led by growth in their Venmo service which saw revenues rise 80% YoY. […]
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