Is it really coming out this time?
paypal holdings (NASDAQ:PYPL) is a company in transition, and new CEO Alex Chriss is trying to turn around a company that has become over-bloated and sinking.
PayPal stock has fallen for three straight years since its 2020 breakout. Down 19.5% in 2021 and down 19.5% in 2021. 62.2% in 2022; As of February 9, the three-year annualized return is -41.6%, and the price has fallen 82% from $311 per share in July 2021 to $56 per share today.
Investors stuck with PayPal waiting for a turnaround may feel frustrated, and rightly so. Should I keep waiting? It’s a complex and personal question, but here are some facts that may help you find the answer.
Still a leader in online payments
The reason there’s so much hope for PayPal’s turnaround is because it’s a leader in online payments, which it revolutionized when it was founded in 1998. PayPal is still the dominant platform in payments, accounting for 41% market share. Venmo is the leading person-to-person payment solution with 38% market share.
How PayPal stock fell despite being a dominant player in two major niche markets is complex, and much has been written about it. But one of the biggest reasons is that the company got too big and bought too many related businesses, many of which failed. Simply put, it was too swollen to swim and it sank.
Chriss joined in September and pledged to turn PayPal around by streamlining operations and focusing on its strengths. But as Chriss explained alongside PayPal’s fourth-quarter earnings call this week, the process will take time.
Fourth quarter performance is actually ahead
There was good news and bad news in the earnings report. Investors placed more weight on the latter as PayPal’s stock price fell 11% to $56 per share on Thursday.
The good news is that PayPal had a pretty good fourth quarter, beating both revenue and revenue estimates by a wide margin.
For the quarter, the company’s revenue increased 9% year-over-year to $8 billion, and operating profit increased 39% to $1.7 billion. PayPal’s operating margin increased 468 basis points (bps) to 21.5%, and earnings per share (EPS) for the quarter increased 61% to $1.29.
For the year, the company’s revenue rose 8% to $29.8 billion, and operating profit rose 31% to $5 billion. PayPal’s operating margin increased 295 basis points to 16.9%, and EPS surged 84% to $3.84.
Looking at some key metrics, total payment volume (TPV) on PayPal platforms this quarter increased 15% to $409.8 billion, while transaction value increased 13% to $6.8 billion. For the year, TPVs increased 13% to $1.53 trillion, while transactions increased 12% to $25 billion. However, the total number of active accounts decreased by 2% to 426 million.
Processing takes time
Unfortunately, the company’s outlook sent its stock price tumbling on Thursday, which wasn’t as positive as its fourth-quarter results.
PayPal expects revenue to increase 6.5% to 7% year-over-year in the first quarter and diluted EPS to increase mid-single digits on a percentage basis. However, analysts expected PayPal’s EPS to grow 8.7% this quarter. For the full year, the company is targeting adjusted earnings of $5.10 per share in 2024, which is roughly in line with 2023 adjusted earnings. Meanwhile, analysts expected fiscal 2024 adjusted EPS of $5.48.
“We are doing a lot to drive change, both internally and externally, as promised,” Chriss said during the fourth quarter earnings call. “But nothing happens overnight. Although it will take time to scale and pivot some of our initiatives, the initial customer response and seller demand for new innovations has been encouraging. “2024 will be a year of transformation with a focus on execution to position our business for long-term success.”
Among its new plans for 2024, PayPal aims to improve and accelerate the checkout process, integrate artificial intelligence to personalize the shopping experience, deepen relationships, simplify processes, and streamline operations.
The company announced in late January that it would reduce its global workforce by about 9% in 2024 as part of a plan to streamline and refocus its operations.
After Thursday’s sell-off, PayPal stock rose about 3% on Friday. The price-to-earnings ratio (P/E) is just 14 and the forward P/E is just 10, so it remains dirt cheap. Should investors believe a turnaround is coming this time? We will be cautious as we move through this transition phase, but continue to watch quarterly to see if management can implement these changes, what impact they will have, and if the economy presents additional challenges.
