A war is being fought for supremacy in the payments industry, and fintech pioneer PayPal (PYPL), which enables digital and mobile payments on behalf of consumers and merchants worldwide, is at the center of it. But can a long-term bet on PayPal still pay off for investors?
The company is set to report fourth quarter fiscal 2022 earnings results after the closing bell Thursday. After dropping from its high to the current level of $82, it is also worth asking whether the market has prematurely proclaimed PayPal’s defeat. Aiming to make cash irrelevant not only for retail transactions, but also in high growth areas such as person-to-person payments, PayPal has a portfolio of tools of digital payments solutions which includes PayPal, PayPal Credit, Braintree, Venmo, Xoom, and iZettle products.
Collectively, these tools not only allow consumers to send and receive payments, but withdraw funds to their bank accounts. The platform also allows consumers the option to hold balances in their PayPal accounts in various currencies. However, slowing growth amid rising competition has been the company’s two main obstacles. The market expects 2022 revenues to grow by only 8%, much slower than its historical record of delivering double-digit growth rates.
That said, PayPal’s valuation has become more appealing. The stock is trading at 12 times EV/EBITDA multiple, which is also well below its historical mean of 22 times. In other words, it’s possible that all of the bad news and lowered expectations have been priced into the stock. Investors on Thursday will want to know how much the company’s cost-reduction initiatives will create value in the next 12 to 18 months, while not sacrificing growth.
For the three months that ended December, PayPal is expected to earn $1.20 per share on revenue of $7.39 billion. This compares to the year-ago quarter when earnings came to $1.11 per share on revenue of $6.92 billion. For the full year, earnings are projected to decline 11.3% year over year to $4.08 per share, while full-year revenue of $27.52 billion would mark a rise of 8.5% year over year.
The company is taking steps to right-size its business amid the global slowdown, recently announcing plans to reduce its headcount by 2,000 employees or roughly 7% of its global workforce. Likewise, the company significantly slowed the pace of its expansion to offset and/or match the growth of the online retail market. “Over the past year, we made significant progress in strengthening and reshaping our company to address the challenging macro-economic environment while continuing to invest to meet our customers’ needs,” CEO Dan Schulman said in a message to employees.
In the third quarter, although the company beat on both the top and bottom lines, there was a noticeable adverse impacts on the business. Q3 revenue of $6.85 billion topped the $6.82 billion analysts expected, while Q3 adjusted EPS of $1.08 beat the 96 cents consensus. Venmo processed $63.6 billion in total payment volume, up 6% year over year, up from $61.4 billion in Q2. During the quarter, net new active accounts were 2.9 million, up from 400,000 in Q2, while total active accounts stand at 432 million, up 4% year over year.
As an early sign of fiscal control, total operating expenses of $5.31 billion declined from $5.50 billion in Q2, though it increased from $4.71 billion in the year-ago quarter. These will be the key metrics investors will focus on when the results are released. For the stock to move higher, PayPal must also show sustained growth in payment volumes, customer accounts in both its core platform and Venmo.
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