Digging into the digital payments giant
Key points to remember
- PayPal suffered its first unprofitable quarter since 2014 as the company struggled to manage its business in a post-pandemic world.
- PayPal plans to cut costs by $900 million to increase profitability and shareholder value.
- Elliott Management, the group of activist hedge fund investors, announced that it had invested $2 billion in PayPal.
PayPal Holdings Inc. ($PYPL) operates a popular digital payment platform for merchants and consumers who want to make digital or mobile payments around the world. If you’ve been online for a while, you’ve probably used PayPal or come across the payment processing platform at some point.
PayPal is a pioneer in digital payments, and the company has had to outlast many competitors over the years to get to where it is today.
PayPal spun off from eBay in July 2015, and PayPal stock has returned handsomely to its shareholders over the years. Even though PayPal reported a net loss for the second quarter of 2022, many analysts view this stock as a buy. Let’s take a closer look at PayPal’s stock.
What is PayPal’s business?
PayPal is a popular digital payment service platform that handles transactions worldwide. The company is best known for collecting money and handling various financial transactions. The company allows you to collect money to exchange goods and provides payment services to merchants. Most of us have heard of PayPal through eBay because it was the auction site’s primary payment processing method for years. If you’ve ever made a transaction online, chances are you’ve used PayPal.
You may also have noticed that they charge you transaction fees. These fees are not that important until you start running an online business. The company generates revenue through transaction fees charged for processing payments globally. Even though it is becoming easier and easier to send money around the world, many countries and businesses still rely solely on PayPal due to accessibility and security.
With 429 million active users worldwide, it’s safe to say PayPal isn’t going anywhere soon as the company’s ventures into cryptocurrency payments and apps like Venmo become more mainstream for simple financial transactions. .
How PayPal Makes Money
The company doesn’t break down every aspect of how it makes money in detail. They have transaction revenue and revenue from other value-added services.
These are the transaction fees charged to merchants and consumers for each transaction. These are the fees you see when you buy or receive money online. Fees are a percentage, so larger purchases will incur higher fees.
PayPal also makes money through currency conversion when processing cross-border transactions. Since many users exchange money across the world, PayPal can generate a lot of revenue through currency conversion.
PayPal charges additional fees for instant transfers of funds from a PayPal or Venmo account to a debit card or bank account, as well as fees to facilitate the buying and selling of cryptocurrencies. The company has started to dabble more in cryptocurrency over the past few years.
Revenue from other value-added services
These revenues come from partnerships, referral fees, subscription fees, gateway fees, and other services provided to merchants and consumers. In addition to this, the company derives income from interest and fees earned on its loan portfolio as well as interest earned on certain assets underlying client balances.
Earnings and balance sheet trends
PayPal announced its second quarter results on August 2, 2022. Results for the quarter were stronger than conservative Wall Street pundits had initially expected. PayPal reported revenue of $6.81 billion for the quarter. This is a 9% increase over the second quarter of last year. PayPal reported a net loss for the quarter of $341 million. This is the first unprofitable quarter reported by PayPal since the first months of 2014.
It’s worth noting that PayPal shares were down 54% year-to-date when they reported second-quarter results. The company has had strong financial results during the pandemic as there has been a boom in online shopping and many people have increased their online consumption in general. However, the company has struggled to adjust to post-pandemic life, according to many experts.
In response to the first net loss in years, the company plans to cut spending by $900 million in 2022 and $1.3 billion in 2023 through cost-cutting measures. These moves should make the company profitable as they make better use of capital to increase shareholder value.
Cash, cash equivalents and investments totaled $15.6 billion as of June 30, 2022. Total assets were $77.81 billion (a 2.64% increase from the prior quarter). Total liabilities were $54.08 billion (down 5.15% from the prior quarter).
Thanks to Venmo’s growth, PayPal added approximately 400,000 new net active accounts in the second quarter that ended June 30. The company had 429 million active accounts at the end of June, 90 million of which are Venmo accounts.
PayPal reported revenue of $25.4 billion in 2021, with annual net income of $4.168 billion, down 0.79% from 2020.
The company also repurchased about 8 million common shares in the second quarter to return $750 million to shareholders.
What’s next for PayPal?
Some analysts have upgraded their ratings for PayPal stock to a buy. Raymond James analyst John Davis estimates that PayPal stock can climb up to 30%. But it’s hard to speculate how big PayPal’s stock will rise, as the stock market as a whole has been volatile lately due to recent inflation reports and fears of a recession.
We will wait to see how the cost reduction initiatives play out over the next year. If the business can make the financial cuts it believes it can make, then the business will become much more profitable.
Venmo’s growth is something we should watch as the company was able to add 400,000 net new activity accounts primarily through this app. With tens of millions of users, this should generate more revenue as the world returns to normal. Post-pandemic life means more people will spend money and share their expenses with friends.
PayPal also confirmed that hedge fund Elliott Management had invested $2 billion and entered into an information-sharing agreement to increase the value. Some analysts back the move because they believe having a tough activist investor as a shareholder could force the company to focus on improving margins. With PayPal stock posting 93 cents per share lower adjusted earnings for the second quarter, investors hope the activist investment firm will help make tough decisions to make the company more profitable going forward.
We should also pay attention to Paypal’s battle with Block ($SQ) as they vie for the cryptocurrency space. Many digital payment services are working on ways to accept cryptocurrency as it becomes more popular.
To top it all off, PayPal also announced that Electronic Arts’ Blake Jorgensen will be its new chief financial officer.
PayPal stock opened on September 14, 2022 at $96.76, with a one-year target price of $120.44. The stock has a one-year range of $67.58 to $285.75, so it’s clear the stock has been volatile lately as the company struggles with post-pandemic business operations and general market conditions. market.
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Even though many analysts consider PayPal stock a buy right now, that doesn’t mean it’s the best move for your wallet. We all have unique goals with different time horizons.
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At the end of the line
PayPal is a giant in the digital payment processing industry. We are almost at the point where everyone expects to have used PayPal. With Venmo becoming more popular, it will be interesting to see how transaction revenue grows for the company. Now we just have to see how PayPal performs with Elliott Management as they focus on reducing costs and improving profitability. We can see why, lately, many analysts are viewing this stock as a buy.
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