- PayPal was one of the biggest beneficiaries of the market’s pandemic boom
- Valuation more reasonable since it lost two-thirds off its value
- Revenue growth should resume and cost cuts planned
PayPal (NASDAQ:PYPL) is proof of how intense the market’s optimism was last year. Yes, shares of speculative companies like electric vehicle manufacturers and online gambling platforms soared in late 2020 and late 2021. But PayPal was hardly a speculative play.
Source: Investing.com
Coming into 2020, the digital payments platform already was an established leader in the space. It had been one of the biggest spin-offs of all time when it separated from eBay (NASDAQ:EBAY) in 2015. Its market capitalization was over $125 billion.
And yet, PayPal stock still rode an incredible roller-coaster. By July 2021, its market cap had nearly tripled in less than 19 months. To put the peak valuation of $362 billion in perspective, Walmart (NYSE:WMT), Home Depot (NYSE:HD), Procter & Gamble (NYSE:PG) and Mastercard (NYSE:MA) all are worth less than that now.
Then, the bottom fell out. PYPL stock at one point fell 78% from its highs. Even with a recovery, the stock still has lost more than two-thirds of its value.
That fact alone doesn’t make PYPL “cheap” here. As we’ve argued elsewhere, it’s clear the market lost its moorings last year.
Even with a bounce of nearly 50%, however, there’s a solid long-term case for PayPal stock. The San Jose, California-based tech giant might not be quite the dominant force implied by last year’s valuation—but there’s more than enough here to justify upside from the current price.
What Happened To PayPal Stock?
The boom in e-commerce, driven by the coronavirus pandemic, was a key factor in PYPL’s meteoric rise during the second half of 2020 and the first half of 2021. PayPal seemed like it would become a dominant player in world finance, and investors priced the stock accordingly.
But that’s not how it has played out. Even with a solid second quarter, and raised full-year guidance for adjusted EPS, PayPal itself expects profits to decline this year. Adjusted EPS in 2021 came in at $4.60; PayPal’s revised outlook for 2022 of $3.87 to $3.97 implies a 14% to 16% decline.
In fact, the guided range is barely above the $3.88 PayPal generated in 2020. That kind of modest growth is not what investors were expecting a year ago. It’s not enough to support a $300-billion-plus market cap—and, from a purely fundamental perspective, probably not enough to support the current valuation. PYPL still trades at 24x the high end of that guidance, a multiple that implies much more profit growth than PayPal has generated of late.
The Case For Improvement
That said, there are mitigating factors at work here. eBay moved its payment processing in-house, which hit PayPal’s 2021 revenue growth by about 7 percentage points, per commentary after the fourth quarter earnings report. The shift is taking another 4 points or so off this year’s revenue growth rate.
The same boom in e-commerce during the pandemic-hit 2020 led to a difficult comparison and a weaker-than-expected holiday season. Tax rates have risen from an unusually low level in 2021 and inflation and macro weakness led to a sharp guidance cut after the first quarter, which sent PayPal stock plunging.
But there’s another issue: PayPal has spent too much money. The company executed an aggressive strategy to bring on new users and spent heavily on marketing and incentives to acquire those users. The catch is that PayPal’s existing users still are driving growth, and so the company is pivoting to focus on increasing usage rather than increasing users.
That’s not the only reversal. On the whole, PayPal is looking to get leaner. Activist investor Elliott Management now has a $2-billion stake in the company—and Elliott clearly is pushing for cost reductions.
PayPal is cooperating. The company should generate $900 million in savings this year and $1.3 billion by next year. That incremental jump, after tax, should add $0.25-$0.30 to EPS—6-8% growth on its own. There’s clearly a path for PayPal, with Elliott’s help, to focus more on earnings and less on revenue growth.
Can PayPal Get Back To Growth?
That path suggests real upside here. PayPal is a company that historically was able to drive double-digit EPS growth, and cost-cutting should help the company get back to that trend in the mid-term.
But there’s also plenty of room for growth. Most notably, Venmo clearly is a valuable asset. The platform, per the Q2 earnings call, should process in the range of $250 billion in payments this year. PayPal is adding “Pay With Venmo” to numerous e-commerce sites which should drive further growth.
Again, last year’s highs merited some kind of decline and even a sharp decline. The optimism toward PYPL was simply too great. But it’s worth noting that PYPL now trades sharply below where it did at the beginning of 2020. Yet, the story, from a long-term perspective, hasn’t changed that much.
There’s still plenty of room for growth. With Elliott on board, and investors clamoring for profits and cash flow over revenue growth and investments, margins should improve. A $15 billion share repurchase program will return capital to shareholders.
There’s still a lot to like here. 2023 should be strong, and that’s where investor focus is starting to turn. As that trend continues, the bounce in PYPL stock should do the same.
Disclaimer: As of this writing, Vince Martin has no positions in any securities mentioned.