PayPal Stock: Not Out Of The Woods Yet (NASDAQ:PYPL)

PayPal (NASDAQ:PYPL) stock has dropped precipitously as investors flee companies that benefited from Covid tailwinds in the past 2 years. At 21.6x forward P/E, many investors appear to believe the risk/reward has become favorable as the majority of the pandemic unwind has been priced in. However, despite the valuation being materially lower than pre-pandemic levels, I believe this is not a buying opportunity as PayPal faces a number of headwinds going forward.

Slowing user growth as the company shifts focus to ARPU in a post-pandemic world

There’s no question that PayPal benefited tremendously from Covid tailwinds and government stimulus. In the last 2 years, PayPal added over 120 million new accounts to now a total of 426 million accounts worldwide. Clearly, a lot of the demand had been pulled forward which perhaps gave management too much confidence in setting the 2025 goal of 750 million accounts. On 4Q21 call, PayPal was unfortunately forced to slash 2022 guidance and now expects just 15 to 20 million new accounts vs. street 52.9 million. This I believe was the primary reason that sent the stock down 25% in one day.

As management no longer expects to hit its 2025 target of 750 million accounts, the focus now shifts towards ARPU, where PayPal expects to better monetize its users with new offerings such as high-yield savings, crypto and stock trading. Previously, incentive programs had been a key driver of new account growth, but the company soon found itself adding too many one-time users who were first drawn to discounts but were no longer active after their first transactions. In fact, roughly 1/3 of accounts contribute the vast majority of PayPal’s TPV. Since user growth is now out of the picture, it’s unclear how far ARPU can go in the backdrop of stiff competition such as Block’s (NYSE:SQ) Cash App in digital wallet and POS, Shopify in e-commerce, Adyen in online payment, Affirm (NASDAQ:AFRM) in BNPL, Robinhood (NASDAQ:HOOD) in stock trading, and Coinbase (NASDAQ:COIN) in crypto.

Venmo is doing great, but not enough to save the day

Venmo finished 2021 with $250 million of revenue (+80% YoY) and is expected to grow at 50%+ in 2022. With 83 million users in the US, Venmo is going live with Amazon, Starbucks and DoorDash in 2022. Strong traction, but it’d be difficult for Venmo to be a meaningful top and bottom line contributor and this, in my view, is what left many investors wondering why the stock didn’t see a sustained rally when the Amazon partnership was first announced. In addition, take rate for Venmo is likely to be lower than average considering the scale of Amazon.

Longer-term growth may not be achievable

While management reiterated 20% revenue growth in the 3-year period ending in 2025, this seems like a rather difficult goal to achieve given 2022 revenue guidance has already been cut twice from 20% to 18% to now 16%. Although the recent Russia/Ukraine crisis shouldn’t present a material risk to PayPal’s business (Russia & Ukraine make up around 0.5% of 2021 revenue), there could be a spillover effect on Europe as the region accounts for 28% of 2021 revenue. As supply chain challenges and inflation are likely to remain present until 2H22, PayPal could experience pressure as the business is heavily tied to discretionary spending.

Speaking of slowing e-commerce growth weighing on PayPal’s results, Adyen reported relatively strong results with revenue up 47% YoY and guidance remained unchanged. In particular, management pointed to the results being “bolstered by the unrelenting rise of online commerce globally.” This indicates PayPal’s results may be more on the micro level vs. macro.

Conclusion

In sum, PayPal is not out of the woods yet and the company will have a lot to prove in 2022. As much as valuation may appear to be attractive, I believe PayPal will need to convince investors with more predictable growth while making sure existing users will transact more on its platform in the face of many competitive alternatives. While the impact of eBay will gradually fade out in 2H22, the potential of revenue acceleration in the second half of the year remains questionable. Therefore, I do not see any reason to own the stock besides a relatively lower P/E ratio.