Fintech Stock to Watch If June 17 Marks the Market Low
Updated: Jul 28, 2022
A revenue miss in 2021 started the sell off in PayPal.
A rumor of an acquisition the market deemed not a good fit accelerated the selling of PayPal's stock.
Now 77% below its all-time high, PayPal's weakness may be a great buying opportunity.
Story
Before FinTech became a Wall Street buzzword, and before Buy-Now-Pay-Later became a big thing, PayPal ($PYPL) was quietly providing investors with solid gains. In 2016 the stock price increased 15%, in 2017 the stock increased 84%, and 10.9% in 2018. And in 2019 the stock price increased nearly 33%. 2020 came, and along with it came the coronavirus. Like most stocks, PayPal declined in late February 2020, bottomed out in March, and then went on an incredible bull run. From PayPal’s March 2020 bottom ($82.07) to its July 2021 all-time high of ($310.16) the stock returned 277%, more than doubling the S&P500’s return (101%) over the same timespan.
Where It Started to Fall Apart
July 28, 2021, PayPal reported earnings for Q2 2021, and missed their revenue estimate by $30 million. The share price dropped 8% after the earnings release and has been in a downtrend ever since.
Where it Continued to Fall Apart
While the stock price was in free fall, a rumor surfaced in October of 2021 that PayPal was interested in acquiring Pinterest ($PINS). The market didn’t take the rumor well and selling of the stock intensified.
Then PayPal’s management switched gears on investors. Instead of keeping an intense focus on growing its users, PayPal's management advised investors the company would begin to focus more on extracting more out of its current user base. Investors weren’t happy with the change in strategy, and continued to sell PayPal's stock.
Also the Buy-Now-Pay-Later movement that gained momentum in 2020 came under heavy scrutiny in 2021 by regulators. Fintech company Affirm ($AFRM), known for its BNPL service and its partnership with Amazon started to sell off in November 2021, dropping 21% over a four day period, and taking Fintech companies with any BNPL exposure down with it. As of this writing, Affirm is down 90% from its $176 high.
Where is PayPal Now
At $71.40 per share, all of the gains from 2021, 2020, and 2019 are gone. The stock hasn’t traded in this range since 2018.
What Could Spark Its Recovery
PayPal has adopted the same strategy Apple ($AAPL) implemented several years back, when iPhone sales began to plateau. Apple, understanding where the company stood in terms of iPhone sales, shifted its focus to services, and getting as much revenue as it could from its iPhone, iPad, and Mac user base, and it has worked brilliantly. Apple’s stock is up 226% since 2018, the time when analysts began to predict the end of Apple due to slowing iPhone sales.
PayPal’s plan to extract more from its user base has worked so far. As of Q1 2022, the company reported transactions per account grew 11% year-over-year, and revenue for Q1 2022 also grew year-over-year by 7.4%.
PayPal is executing its plan by introducing new products to its user base. PayPal has become more than an app used to send money to friends and family, or purchase stuff from eBay. PayPal now offers a buy-now-pay-later feature, a PayPal Credit feature, business debit and credit cards, and the ability to send and receive cryptocurrency. PayPal is slowly transforming itself into a more modern version of a traditional bank.
Before Facebook, PayPal was the master of aggressive growth. The company grew quickly by offering money to anyone who opened a PayPal account, making its cost to acquire customers quite expensive. By switching strategies from user growth to growing customer transactions, the company can decrease its customer acquisition costs while still growing revenue.
PayPal ended Q1 2022 with 429 million users and expects to add a total of 10 million new accounts in 2022. The company’s revenue trumps that of Block ($SQ) and Affirm, the two Fintech firms that PayPal is often grouped with, but PayPal’s revenue also trumps Mastercard and is just slightly behind Visa.
PayPal’s forward price-to-earnings is lower than Block, Visa, and Mastercard, but above the average of the of the companies that make up the S&P 500’s Financial Services sector, and the company’s forward price-to-sales is the lowest of the Fintech companies shown above that are profitable.
Pure Speculation, But...
Last week Bloomberg reported that cryptocurrency firm FTX was exploring a path to acquire the investment trading platform Robinhood ($HOOD). Robinhood's stock jumped 14% on news of the possible acquisition, which was a strong sign from the markets that investors are in favor of Robinhood being acquired. As a privately held company, Robinhood was a disruptor of traditional finance with a high valuation. In September 2020, before it was a public company, Robinhood raised $460 million at an $11.6 billion valuation. Robinhood went public in 2021, and as a publicly traded company things haven't gone so well for Robinhood's stock. The stock currently trades for $8.18, which is 78% below its IPO price.
FTX passed on Robinhood, and instead turned its attention to troubled crypto lender BlockFi, which means Robinhood is still in play for a willing buyer. For $6.8 billion, Robinhood's current market cap, plus a respectable premium, PayPal could acquire nearly 16 million active users and $98 billion of assets under custody. The downside of a Robinhood acquisition by PayPal would be that PayPal would be buying a business that reported $3 billion in net losses in 2021. In addition, the topic of payment for order flow, Robinhood's main source of income, is still being debated by regulators. It seems there will be more political talk around payment for order flow than actual action to regulate it, but if action were to be taken, it would stifles Robinhood's ability to generate revenue.
Investors weren't wrong to pause buying on PayPal when the stock broke over $300 per share, the valuation was very lofty, even for an incredible company like PayPal, but investors may have sold a bit too aggressively. PayPal's plan of extracting more out of its current user base is a great move considering the current economic conditions. Large tech companies like Meta/Facebook, Google, Tesla and others have either paused hiring or conducted layoffs. Analysts are predicting a recession. The game plan within tech and other industries has shifted from growth at all costs, to watching expenses. Less money spent acquiring customers and more focus on servicing existing users should result in a more efficiently run PayPal, which is a positive for shareholders.
PayPal is down but not out. If buying into weakness doesn’t turn you off, PayPal is definitely worth a look.