PayPal Selloff Creates a Stock Worth Paying For
Near-term macroeconomic headwinds and competitive pressures may make for a challenging 2022, but this period will ultimately be looked back upon as a great time to buy PayPal stock.
PayPal (NASDAQ: PYPL) is well known as a popular technology platform for buyers and sellers. Lately, however, it has been associated exclusively with sellers—as in sellers of the company's stock.
In the aftermath of a disappointing fourth-quarter update, PayPal shares have dropped to their lowest level since May 2020. They are trading nearly 60% off last summer's peak and on track to suffer their fifth monthly decline in the last six months.
This paints a gloomy picture for a digital payments leader that could seemingly do no wrong. The onset of the Covid-19 pandemic accelerated PayPal's e-commerce growth opportunity, but now tough year-over-year comparisons are turning a blessing into a curse.
The good news is PayPal's underlying demand is still strong and its long-term growth prospects as solid as ever. Near-term macroeconomic headwinds and competitive pressures may make for a challenging 2022, but this period will ultimately be looked back upon as a great time to buy.
Why is PayPal Stock Down?
Due to unusually high demand for digital payment solutions in the wake of the Covid-19 outbreak, PayPal will face some difficult year-over-year financial comparisons this year. Management cited this in offering a tepid 2022 outlook. Revenue growth is forecast to be a more modest 16% at the midpoint and earnings growth is expected to be flat or in the low single digits.
Adding a wrinkle to the tough comps is the anticipated impact of inflation on consumer transaction volumes. Rising prices on both staples and discretionary goods are set to have a significant impact on how much people spend in 2022 and especially lower-income families.
Then there is the ongoing impact of supply chain disruptions that are making it hard for retailers to maintain inventory for would-be buyers. This is expected to weigh on both domestic and cross-border transaction volumes.
The 'everything but the kitchen sink' list of reasons for the soft 2022 guidance sparked a high-volume selloff in PayPal's stock. Thirty-seven dollars (over $44 billion in market cap) was shed from the company's share price on the day of the Q4 report. It finally showed signs of stabilization on Friday closing up 1.5% to around $126.
What are PayPal's Growth Opportunities?
PayPal's two most closely watched metrics—payment volumes and active accounts—both continued to trend higher in Q4. Over the last two years, 122 million net new active accounts were added to its platform. And while there was undoubtedly a pull-forward effect tied to the pandemic, the company now has a sharply higher account base from which it can generate increased payment volumes.
Heading into 2022, management has shifted its marketing focus. This stems from the expectation that it will add only 15 million to 20 million new active accounts this year compared to 49 million in 2021. To combat the slowdown, it will focus less on new users and more on increasing utilization from existing users. It is a pivot that should turn out well given PayPal's expanding set of features and offerings. The rollout of cryptocurrency solutions may be its biggest such near-term catalyst. Higher user engagement could lead to better-than-expected transaction volumes and positive earnings surprises.
Longer term PayPal should benefit from the shift in the global payments landscape from cash and checks to digital forms of payment. Consumers and merchants worldwide are expected to increasingly adopt mobile payment alternatives which will play into current offerings like Venmo and future PayPal innovations.
The buy-now-pay-later (BNPL) space is another promising growth driver. PayPal is in the midst of expanding its BNPL services by launching short-term installment plan options in the U.S. and U.K. With this payment method gaining steam with consumers everywhere, expect PayPal to capitalize on its 200-plus country footprint as markets in the early stages of the digital transactions shift bring PayPal into the mainstream.
Is PayPal Stock a Buy?
At some point, the near-term challenges that are expected to plague PayPal will be looked at as having created a fantastic buy opportunity for long-term investors. They will amount to mere bumps in the road for a company whose multi-year growth story is well intact.
PayPal's global brand recognition and tech-forward innovations and integrations are major competitive advantages. They should help it fend off heavy competition from the likes of ApplePay, Visa Checkout, Mastercard's MasterPass and others. More and more merchants will be accepting digital payments in conjunction with consumer trends, and many will turn to PayPal. The company's early mover advantage and formation of powerful partnerships with the likes of Amazon should make it a long-term winner in digital payments.
Eventually, the market will get over the disappointing outlook and regain an appreciation for PayPal's positioning in what will likely be one of the most potent consumer themes of the next 3 to 5 years. As it does, the stock will gradually regain the premium valuation it has long held and give patient shareholders some sizeable cash-back rewards.
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