Stocks often move on the results disclosed in an earnings report, but the upticks and downticks just add some lively action on the way to long-term gains (or losses). It’s always important to keep the big picture in mind when making investment decisions and not to sweat what are often small blips on a large radar screen.
One way downticks can be useful, however, is when they provide investors with the ability to buy shares of great companies when they’re down, especially if the dip is significant. That’s what’s been going on with PayPal Holdings (PYPL -4.52%). Paypal’s stock is down more than 50% this year, but its first-quarter earnings report confirms that this monster stock is far from finished.
What’s going on with PayPal?
Investors have been disappointed with PayPal, as growth has decelerated after some of its strongest quarters ever. Understandably, growth skyrocketed at the beginning of the pandemic, with high revenue increases and millions of new users. That was bound to slow down, and the question is where that leaves the company. Add to that high inflation, rising interest rates and Russia’s invasion of Ukraine, and it’s a recipe for negative investor sentiment.
That’s led to PayPal stock’s poor performance this year. However, investors got some good news on Wednesday when the company posted first-quarter earnings. Revenue increased more than expected, with a 7% year-over-year increase instead of the 6% management had predicted. Without revenue from eBay, which is transitioning away from PayPal as its payments system, it was a 15% increase. Adjusted, or non-GAAP (generally accepted accounting principles), earnings per share (EPS) came in at $0.88, a penny higher than company forecasts.
Although these numbers might seem discouraging at first glance, consider that this was on top of a 31% increase last year and the company’s strongest quarter ever. This evens things out a bit, and it’s not surprising to see some choppiness after an unusual event.
Digital payments are just beginning
PayPal has been around since 1998 and has changed the payments industry. But although it has grown tremendously and is one of the biggest payments companies today, processing $1.25 trillion in the trailing 12 months, the pandemic has ushered in a new digital area where new opportunities abound for PayPal.
It has shifted its focus to generating higher engagement from its most loyal customers, but it’s still adding millions of new users each quarter, including 2.4 million net new active customers in the 2022 first quarter. PayPal has also successfully acquired complementary businesses and created robust partnerships to expand its reach and deepen its relationships with its customers. For example, it’s in the process of integrating with Amazon, which could be a huge growth catalyst.
It also redesigned its app last year, adding many features to be a one-stop personal finance app, and about half of its users have downloaded it. Shoppers who use the app spend 25% more than those who don’t, and this demonstrates how investments in key parts of its business can bring about higher revenue from current customers.
No way but up
Before the earnings report came out, PayPal stock was down almost 70% this year, which brought its price-to-earnings ratio down to 23. Investors took a deep breath of relief after the earnings were released, and although management lowered guidance, Wall Street took it as a good sign that management offered more clarity about the company’s future.
PayPal stock gained 12% in one day as investors pounced on the opportunity, but it’s not too late to buy. Shares are still trading at a historically low 24 times trailing 12-month earnings, and the long-term prospects look very compelling.