PayPal Pummeled After 4Q Earnings Report; Selling May Be Overdone

After the regular market close on February 1, Digital payments giant PayPal Holdings, Inc. (NASDAQ: PYPL) reported approximately in-line 4Q earnings and issued disappointing 2022 revenue, earnings and customer growth guidance, mirroring its 3Q earnings release which likewise included less robust than expected 4Q 2021 forecasts. In turn, investors have absolutely pummeled PayPal shares sending them down more than 24% on February 2. This decline, which equates to a loss of around US$50 billion in stock market capitalization, marks the stock’s worst-ever one day percentage loss.

The market’s reaction is at least somewhat surprising in that the company embraced a strategy change to focus more on, and to develop, profitable users rather than simply acquiring new users. Implementing (or even announcing) such a shift which emphasizes profitability growth over revenue growth is typically embraced by investors. 

Many stock market commentators and analysts have tripped over themselves to discuss management’s poor performance in the quarter and to express a lack of confidence in the company going forward. In our view, the decline in the stock may be overdone and the current share price may represent a reasonable entry point.  

PayPal reported 4Q 2021 revenue and earnings of US$1.11 per share and US$6.90 billion, respectively, essentially within analysts’ consensus forecasts of US$1.12 per share and US$6.90 billion. Notably, 4Q 2021 revenue increased 22% year-over-year excluding eBay revenue. Under a prior agreement, eBay is removing PayPal as a payment option; its customers will use its own payments service. (eBay acquired PayPal in 2002 and subsequently spun it off to its shareholders in 2015.) Total PayPal payment transactions were 5.3 billion in the quarter, up 21% year-over-year. Its active users reached 426 million as of December 31, 2021.

Perhaps most importantly, PayPal’s free cash flow rose to US$1.6 billion in the fourth quarter and US$5.4 billion for the full year 2021. Remarkably, PayPal’s free cash flow represents more than 20% of its revenue.

(in millions of U.S. dollars, except for shares outstanding)4Q 20213Q 20212Q 20211Q 20214Q 2020
Revenue$6,918$6,182 $6,238 $6,033$6,116
Operating Income$1,050$1,043 $1,127 $1,042 $963 
Operating Cash Flow$1,763$1,513 $1,306 $1,758 $1,347 
Free Cash Flow$1,600$1,286 $1,059 $1,537 $1,100 
Cash – Period End$9,500$13,292 $12,395 $13,086 $13,083 
Debt – Period End$8,049$7,949 $8,945 $8,942 $8,939 
Shares Outstanding (Millions)1,1681,1741,1751,1741,172

PayPal guided to US$4.60 – US$4.75 in EPS for 2022, up just slightly from US$4.60 in 2021, and considerably below consensus forecasts of about US$5.22 per share. (Earnings in 2021 benefited from US$0.21 per share of credit loss reserve releases; excluding that benefit, 2021 EPS would have been US$4.39.) The company projected 2022 revenue growth of 15% – 17% (19% – 21% excluding eBay), just below the 18+% outlook it issued in November 2021.

Putting all this together, PayPal is still a fast-growing company and one that generates enormous free cash flow, trades at a P/E based on 2022 earnings of about 28.4x. The typical S&P 500 company, on the other hand, trades at a multiple of approximately 20.3x; growth companies within the index frequently trade at much higher multiples than the index average.

More positively and as noted above, PayPal’s revenue could increase about 16% in 2022. Conversely, total S&P 500 revenue is projected to grow at only about half that pace, or around 7.7%.

PayPal Holdings, Inc. last traded at US$126.08 on the NASDAQ.

Information for this briefing was found via Edgar and the companies mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

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