Shares of major fintech companies have been battered over the past few months. Companies like Adyen, To blockand Assets received have been crushed as higher interest rates and expectations of slowing economic growth squeeze valuation multiples and cloud the previously favorable outlook for these companies.
PayPal Credits (PYPL -2.05%), perhaps the fintech industry leader, was not spared. Since hitting an all-time high of over $310 about a year ago, its stock has fallen over 70% for many of the same reasons that plague the rest of the industry. Additionally, with inflation still on the rise according to the June Consumer Price Index, I fear that PayPal’s business will continue to be negatively affected.
Let’s take a closer look.
PayPal relies on discretionary purchases
“At the same time as this is happening, there is the effect of a weaker economy and higher inflation putting pressure on consumers’ disposable income,” said then-chief financial officer John Rainey on the first quarter earnings call. “One of the things we’ve seen on our platform during the pandemic is definitely a shift to more discretionary versus non-discretionary,” he continued. “And again, the non-discretionary elements, think of things like gasoline, food, energy, those aren’t necessarily where all of our strengths are.”
With the price of everything apparently having risen significantly over the past few months, it’s obvious that households that are forced to stretch their budgets would prioritize basics over nice-to-have discretionary goods. And this situation does not bode well for PayPal’s business. Consumers will tighten their spending in anticipation of tough economic conditions. The result is less payment volume and revenue for PayPal.
Last year, PayPal processed $1.25 trillion in total payment volume (TPV) and generated $25.4 billion in revenue. Management, led by CEO Dan Schulman, originally projected 2022 TPV and revenue to be $1.5 trillion and more than $29 billion, respectively. But those estimates have since declined. Thanks to the inflationary environment, the diminishing impact of government stimulus measures and the return of in-person shopping, PayPal is now expected to post a POS of $1.4 trillion this year on sales of $28.4 billion. dollars (at midpoint). Add to that the threat of an impending recession and the outlook can quickly turn negative.
As of December 31, PayPal’s payment option was available at 76% of the top 1,500 online merchants in North America and Europe, making it easily the most accepted digital wallet. Additionally, Venmo, PayPal’s personal finance mobile app for consumers, had 70 million annual active users in 2021. The company’s enormous size, exemplified by the 429 million accounts it had as of 31 mars, is a key competitive advantage for the company. . But there is no doubt that rampant inflation and a possible economic downturn would significantly hamper business on PayPal’s platform.
PayPal is a quality company
Despite the headwind of near-term inflation, PayPal remains a superb company from a financial perspective. In 2021, the company posted a gross margin of 47% and an operating margin of 17%. Additionally, since capital expenditures are typically only 4% of revenue, PayPal was able to generate $5.4 billion in free cash flow last year. It’s exceptional, whichever way you look at it.
Wall Street is optimistic about the company’s prospects. Consensus analysts estimate revenue to grow at a compound annual rate of 13.5% between 2021 and 2026, while also forecasting earnings per share to grow 15.1% annually over the same period. PayPal’s current price-to-earnings ratio of 25 is the lowest since the company was spun off from eBay in 2015. Therefore, based on these assumptions, it is not unreasonable for investors to expect that stocks could double over the next five years.
Inflation impacts every business today, and PayPal is no exception. Fortunately, its massive user base, history of growth, and excellent financials put the odds of long-term success in its favor.
Neil Patel holds positions at Block, Inc. The Motley Fool holds positions and recommends Adyen NV, Block, Inc., PayPal Holdings and Upstart Holdings, Inc. The Motley Fool recommends Adyen and eBay and recommends the following options: short July 2022 $57.50 calls on eBay. The Motley Fool has a disclosure policy.