{"id":50090,"date":"2023-08-18T11:21:09","date_gmt":"2023-08-18T15:21:09","guid":{"rendered":"https:\/\/ifintechworld.com\/news\/paypal-stock-think-twice-before-loading-up-here-nasdaqpypl\/"},"modified":"2023-08-18T11:21:13","modified_gmt":"2023-08-18T15:21:13","slug":"paypal-stock-think-twice-before-loading-up-here-nasdaqpypl","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=50090","title":{"rendered":"PayPal Stock: Think Twice Before Loading Up Here (NASDAQ:PYPL)"},"content":{"rendered":"
\n

<\/picture>
<\/figcaption><\/figure>\n<\/p>\n

The last and only time I wrote about PayPal Holdings, Inc<\/strong> (NASDAQ:PYPL<\/span>) was after its Q1 FY2023 report in May, after which PYPL stock fell nearly 13% in one day and then continued to fall, losing another 10% or so after that heavy dip.<\/span><\/p>\n

In my May article, I argued that PYPL was not that undervalued even after such a massive correction. My valuation analysis at the time led me to conclude that PYPL should only yield about 20% over the next 5 years, meaning the stock should only grow by 3.72% annually. That was too low for a “Buy” recommendation.<\/p>\n

A few days ago, the company reported on Q2 FY2023 results, and some of my predictions came true. In any case, the downtrend is not over yet:<\/p>\n

\n

\"TrendSpider<\/span><\/picture>
\n

TrendSpider Software, author’s notes<\/p>\n<\/figcaption><\/figure>\n<\/p>\n

Today, I would like to update my coverage and reassess my past projections based on what we saw in PYPL’s Q2 financials.<\/span><\/p>\n

Q2 Results And What They Caused<\/h2>\n

PayPal’s Q2 results, published on August 3, 2023, showed Non-GAAP EPS of $1.16 in line with expectations, and revenue of $7.3 billion beating estimates by $30 million [7.4% YoY growth]. Total payment volume hit $376.5 billion, up 11%, and transactions grew by 10%. Active accounts reached 431 million. The management provided FY2023 guidance with GAAP EPS of ~$3.49 (+67% up from $2.09 in FY2022) and Non-GAAP EPS growth of ~20% to ~$4.95 (+19.8% up from $4.13 in FY2022).<\/p>\n

You would think that the results should make investors happy – just look at the forwarding increase in EPS [according to the guidance]. But on the day the PYPL report was released, the stock plummeted >12% and has continued to edge lower ever since:<\/p>\n

\n

\"TrendSpider<\/span><\/picture>
\n

TrendSpider Software, author’s notes<\/p>\n<\/figcaption><\/figure>\n<\/p>\n

Why is it happening?<\/em><\/p>\n

The decline can be mainly attributed to a continued decrease in active accounts for the second consecutive quarter:<\/p>\n

\n

\"Seeking<\/span><\/picture>
\n

Seeking Alpha data<\/p>\n<\/figcaption><\/figure>\n<\/p>\n

Investors fear that PYPL will continue to lose market share as a result of this inexorable decline. So far, no clear consequences can be derived from the factual financial results.<\/p>\n

\n

\"Chart\"
Data by YCharts<\/figcaption><\/figure>\n<\/p>\n

As Argus Research analyst, Stephen Biggar, wrote in his note [August 3, 2023 – proprietary source], the company has altered its marketing strategy to focus less on new users and more on greater utilization by existing users. Over the past few years, the firm expanded its “Buy Now Pay Later” [“BNPL”] offering by introducing short-term installment products in the U.S. and UK. It also launched a new service enabling customers to trade cryptocurrencies using their PayPal accounts.<\/p>\n

In my opinion, the problem with PYPL lies in its poor unit-economics metrics, as well as in the excessively high valuation that investors initially gave in the hope of quickly conquering the market in new segments.<\/p>\n

Let’s first update my model with the Q2 numbers – they will help me explain what exactly I mean by poor unit economics.<\/p>\n

\n

\"Excel,<\/span><\/picture>
\n

Excel, author’s work<\/p>\n<\/figcaption><\/figure>\n

\"Excel,<\/span><\/picture>
\n

Excel, author’s work<\/p>\n<\/figcaption><\/figure>\n<\/p>\n

As you can see, although in absolute terms PYPL’s revenue has grown at a CAGR of 15.1% since 2013, the revenue-per-transaction ratio has been falling by ~5.2% annually.<\/p>\n

Still, the growth in the “Revenues from other value-added services” that you could see in the infographic below doesn’t add any tangible incremental growth or diversification, as the share of this segment in the revenue structure has only grown to just 10% of consolidated revenue figure:<\/p>\n

\n

\"Excel,<\/span><\/picture>
\n

Excel, author’s work<\/p>\n<\/figcaption><\/figure>\n<\/p>\n

So we notice that the company’s new projects don’t really bring strong overall top-line growth. PYPL’s revenues continue to decline as the addressable market becomes more and more saturated. Here is where the disappointing picture of falling valuation metrics comes from. The P\/E ratio, for example, has fallen from ~40-40x in FY2022 to just ~16x as investors discount PYPL’s ability to grow as strongly as it was expected previously:<\/p>\n

\n

\"Chart\"
Data by YCharts<\/figcaption><\/figure>\n<\/p>\n

As last time, let’s assume the PYPL will be able to grow its user base by only 2% YoY over the next 5 years [which is already better than the decline in Q1 and Q2]. Then my earlier predictions on PYPL’s key unit economic metrics should still hold:<\/p>\n

<\/span><\/p>\n\n\n\n\n\n\n\n\n
Year<\/strong><\/td>\nUsers [M]<\/strong><\/td>\nTransactions [B]<\/strong><\/td>\nSales [$M]<\/strong><\/td>\nRevenue-per-transaction<\/strong><\/td>\n<\/tr>\n
2023<\/td>\n441.66<\/td>\n24.98<\/td>\n$29.22<\/strong><\/td>\n1.17 *<\/td>\n<\/tr>\n
2024<\/td>\n450.49<\/td>\n27.97<\/td>\n$32.07<\/strong><\/td>\n1.15<\/td>\n<\/tr>\n
2025<\/td>\n459.50<\/td>\n31.33<\/td>\n$35.2<\/strong><\/td>\n1.12<\/td>\n<\/tr>\n
2026<\/td>\n468.69<\/td>\n35.09<\/td>\n$38.64<\/strong><\/td>\n1.10<\/td>\n<\/tr>\n
2027<\/td>\n478.07<\/td>\n39.3<\/td>\n$42.41<\/strong><\/td>\n1.08<\/td>\n<\/tr>\n
Assumptions [YoY]<\/strong><\/td>\n+2%<\/strong><\/td>\n+12%<\/strong><\/td>\n <\/td>\n-2%<\/strong><\/td>\n<\/tr>\n<\/table>\n

<\/span><\/span>