PayPal Holdings (NASDAQ:PYPL) is a company in transition, with new CEO Alex Chriss looking to turn around a firm that got too bloated and sank.
Since its breakout year in 2020, PayPal stock has dropped three straight years: 19.5% in 2021; 62.2% in 2022; and 13.8% in 2023. Its three-year annualized return as of Feb. 9 is -41.6% per year, and its price has dropped 82% from a high of $311 per share in July 2021 to $56 per share today.
Investors who have hung with PayPal waiting for the turnaround may be getting frustrated, and rightfully so. Should they continue to wait? That is a complicated and personal question, but here are some facts that might help you find the answer.
Still the leader in online payments
The reason there is so much hope for a PayPal turnaround is because it is still the leader in the online payments space, one that it revolutionized when it was founded in 1998. PayPal is still the dominant platform for payments with a 41% market share, and its property Venmo is the leading person-to-person payment solution with a 38% market share.
How PayPal stock has fallen, despite being the dominant player in its two key niches, is complicated, and much has been written about it. However, one of the big reasons is that it got too big, buying up too many tangential businesses, many of which failed. In simple terms, it got too bloated to swim, and it sank.
Chriss came on board in September and vowed to right the ship by streamlining operations and narrowing PayPal’s focus to its strengths. However, the process will take time, as Chriss explained this week with the release of PayPal’s fourth-quarter earnings.
Earnings beat in Q4
The earnings report featured some good news and some not-so-good news. Ultimately, investors gave more weight to the latter as PayPal’s stock price dropped 11% on Thursday to $56 per share.
The good news is that PayPal had a pretty good fourth quarter, beating both revenue and earnings estimates by pretty wide margins.
The company’s revenue rose 9% year over year to $8 billion in the quarter, while its operating income increased 39% to $1.7 billion. PayPal’s operating margin expanded 468 basis points to 21.5%, and its earnings per share (EPS) increased 61% to $1.29 in the quarter.
For the full year, the company’s revenue climbed 8% to $29.8 billion, while its operating income increased 31% to $5 billion. PayPal’s operating margin expanded 295 basis points to 16.9%, and its EPS surged 84% to $3.84.
Looking at some of the key metrics, the total payment volume (TPV) on PayPal’s platform jumped 15% to $409.8 billion in the quarter while its transactions increased 13% to 6.8 billion. For the full year, TPV rose 13% to $1.53 trillion, while transactions surged 12% to 25 billion. However, the number of total active accounts decreased 2% to 426 million.
Turnaround takes time
Unfortunately, the stock tanked on Thursday due to the company’s outlook, which was not as positive as its Q4 earnings were.
In the first quarter, PayPal expects its earnings to climb 6.5% to 7% year over year and its diluted EPS to rise in the mid-single digits, percentage-wise. However, analysts had projected PayPal’s EPS to climb 8.7% in the quarter. For the full year, the company’s adjusted earnings were targeted at $5.10 per share for 2024, roughly in line with 2023 adjusted earnings. Meanwhile, analysts had expected adjusted EPS of $5.48 for fiscal 2024.
“As promised, we’re doing a lot of things to drive change internally and externally,” Chriss said on the Q4 earnings call. “However, nothing happens overnight. It will take time for some of our initiatives to scale and move the needle, but the initial customer reaction and merchant demand for our new innovations has been encouraging. 2024 is going to be a transition year, focused on execution to position the business for long-term success.”
Among the new initiatives in 2024, PayPal is looking to improve and speed up the checkout process, incorporate artificial intelligence to personalize the shopping experience, and deepen relationships, simplify processes, and streamline operations, among others.
As part of the plan to streamline and refocus operations, the company announced in late January that it will reduce its global workforce by approximately 9% in 2024.
After Thursday’s sell-off, PayPal stock was up by about 3% on Friday. The stock remains dirt cheap with a price-to-earnings (P/E) ratio of just 14 and a forward P/E of only 10. Should investors believe it this time — that the turnaround is coming? I’d be wary as it moves through this transition phase, but keep an eye on it from quarter to quarter to see if management can execute on these changes, what impact they have, and if the economy presents additional challenges.
