Although PayPal Holdings (NASDAQ:PYPL) is trading far below its $310 high, 2022 is a rough market for technology stocks. PYPL stock plunged after posting a slowdown in the latest quarter.
It is not alone in the group of stocks falling after weak earnings. Investors will not put up with companies facing a sharp deceleration in growth. Last week, the stock regained some ground due to Nasdaq’s rebound.
PayPal joins Roku (NASDAQ:ROKU) and Netflix (NASDAQ:NFLX) as former momentum stocks that face strong selling pressure.
PYPL Stock Due for a V-Shaped Rebound
Since peaking at over $300 last summer, bottom-fishing investors in PayPal tried but failed to re-start a rally. PayPal’s valuations are almost three-fold higher than financial institutions. Its price-to-earnings (P/E) of 30 times would sound cheap if it were 2019 – 2021. The macroeconomic environment for 2022 is completely different.
The central bank will remove money from the stock market and raise interest rates. PayPal’s soft first-quarter results and light guidance for 2022 will limit the chances of a v-shaped rebound. Still, PayPal posted a solid fourth quarter/2021 finish. Total payment volume grew by 23% year-over-year (YOY) to $339.5 billion. Net revenue grew by 13% YOY to $6.9 billion. The GAAP earnings per share (EPS) was 68 cents.
For fiscal 2022, total payment volume will grow in the range of 19% to 22%. Revenue is forecasted to grow at between 15% to 17%. GAAP EPS will be in the range of $2.97 to $3.15. On a Non-GAAP EPS measure, it will report $4.60 to $4.75. The forward P/E of below 25 times gives PayPal investors a decent level of safety.
PayPal posted an operating cash flow of $6.3 billion last quarter. It has many options ahead in reaccelerating growth. It could acquire companies to increase its presence in the e-commerce space. For instance, last year, markets floated the idea of PayPal buying Pinterest (NYSE:PINS). While it has the cash to buy the company, Pinterest will not increase investor returns.
PayPal acquired Happy Returns to anchor its post-purchase process. Customers may return goods with ease and at affordable levels. This will drive user engagement. In the back half of the quarter, it pared customer acquisition efforts.
PayPal recently pared incentive-led campaigns. It disqualified certain accounts from its campaigns. This hurt its net new active number. Algorithmic traders that picked up the weaker customer count failed to recognize the meaning. PayPal needed to remove accounts that it found were not legitimate and needs to retain good accounts for future campaigns. For its future incentive campaigns, PayPal will not reward accounts that are taking advantage of its platform.
In the fourth quarter, PayPal counted an immaterial 4.5 million account creations out of its overall 426 million customer accounts. From now on, it may confidently launch aggressive customer engagement campaigns in 2022.
PayPal reset investor expectations when it set a revenue growth guidance of 15% to 17%. A few months ago, it expected 18% growth. The company has a more conservative forecast. It is seeing spending weakness from its lower-income group.
Venmo could drive transaction volumes this year. As businesses navigate through supply chain issues and inflationary pressures, customers may increase their Venmo use at checkout. In the fourth quarter, Venmo accounted for $250 million of revenue, up by 80% YOY. PayPal is in the early phases of monetizing it. It began implementing Venmo on Amazon.com (NASDAQ:AMZN), which should increase transaction volumes this year.
Risks for PYPL Stock
PayPal’s business separation from eBay (NASDAQ:EBAY) is a headwind. Total payment volume fell by 45% YOY. Fortunately, eBay volumes represented only 2.7% of total volumes. Last year, eBay accounted for 6% of the total volume.
Last year’s stimulus money helped eBay’s business, which benefited PayPal. PayPal will grow revenue by 13% without eBay’s support. It has many initiatives ahead that will offset the lost eBay business in 2022 and beyond.
Macroeconomic headwinds will persist in 2022. The government is no longer stimulating the economy in the post-pandemic world. Inflation is so high that the U.S. Federal Reserve (Fed) is in panic mode. The Fed will raise rates several times this year to slow the economy. This will hurt PayPal’s transaction volumes. The fintech giant will need to control expenses without hurting customer service levels.
It could pull it off.
PayPal has a consistent history of beating investor expectations. Analysts are bullish on PayPal stock. Per Tipranks, the price target ranges from $107 to $245. The average price target is $182.36.
Your Takeaway on PYPL Stock
PayPal is one of the few fintech giants that current investors should consider as a core holding. The stock may underperform for a while. Conversely, it may continue its v-shaped rebound that began on the week of Mar. 14, 2022. In that week, the Nasdaq rose by over 8%. To sustain a rally, PayPal needs market sentiment to remain positive.
Rational investors cannot time the market by predicting sentiment. Similarly, traders may speculate on a sharp rebound by guessing. Instead of doing either of those things, establish a price zone at the right P/E multiple. Wait for the stock to trade at a P/E to growth (PEG) multiple that suits your risk tolerance. From there, start a position.
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Source: Investor Place