Shares of major fintech companies have taken a beating over the past few months. Companies such as Adyen, Block and Upstart Holdings took a beating as higher interest rates and the expectation of slower economic growth reduced multiples and dampened the previously rosy outlook for these companies.
PayPal Holdings (PYPL -2.05%) , perhaps the leader in the fintech industry, is not spared. Since hitting an all-time high of more than $310 about a year ago, its stock has fallen more than 70% for many of the same reasons that hurt the rest of the industry. Additionally, with inflation still rising according to the June CPI, I worry that PayPal’s business will continue to be negatively impacted.
PayPal leans on discretionary purchases
“At the same time that’s happening, there’s the effect of a weaker economy and higher inflation putting pressure on consumers’ disposable income,” then-Chief Financial Officer John Rainey said in a first-quarter earnings call. “One of the things we’ve seen on our platform during the pandemic is certainly a shift to more discretionary versus non-discretionary items,” he continued. “And again, non-discretionary items, think about things like gas, food, energy, that’s not necessarily where all of our strengths are.”
With the price of seemingly everything having risen significantly over the past few months, it’s obvious that households forced to stretch their budgets will prioritize staples over nice-to-have discretionary goods. And this situation does not bode well for PayPal’s business. To see also : Deborah Crown has been appointed dean of the Graziadio Business School. Consumers will reduce their spending in anticipation of tough economic times. The result is lower 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 forecast 2022 TPV and revenue of $1.5 trillion, or more than $29 billion. However, these estimates have since decreased. Thanks to an inflationary environment, the waning impact of government stimulus and the return of in-person shopping, PayPal is now expected to post a TPV of $1.4 trillion this year on sales of $28.4 billion (mid). Add in the threat of a looming 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, easily making it the most accepted digital wallet. What’s more, Venmo, PayPal’s consumer-facing mobile personal finance app, had 70 million annual active users in 2021. The company’s sheer size, demonstrated by the 429 million accounts it had as of March 31, is a key competitive advantage for the business. But there is no doubt that raging inflation and a possible economic slowdown would significantly hamper activity on the PayPal platform.
PayPal is a quality business
Despite the short-term headwinds of inflation, PayPal is still a great business from a financial perspective. In 2021, the company achieved a gross margin of 47% and an operating margin of 17%. Additionally, since capital expenditures typically represent only 4% of revenue, PayPal was able to generate $5. See the article : 502 Black Business Week offers exposure to locally owned businesses.4 billion in free cash flow last year. It’s remarkable any way you look at it.
Wall Street is optimistic about the company’s outlook. Analyst consensus estimates call for revenue to grow at a CAGR of 13.5% between 2021 and 2026, while also forecasting EPS growth of 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. So, based on these assumptions, it’s not unreasonable for investors to expect that the stock could double over the next five years.
Inflation affects every business today, and PayPal is no exception. Fortunately, its huge user base, history of growth and excellent financial results put the odds of long-term success in its favor.
Neil Patel holds positions in Block, Inc. The Motley Fool has positions in and recommends Adyen N.V., 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.
Neil Patel holds positions in Block, Inc. The Motley Fool has positions in and recommends Adyen N.V., 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.
