PayPal Stock: Inside the Digital Payments Giant – Forbes | Jewelry Dukan

The central theses

  • PayPal suffered its first unprofitable quarter since 2014 as the company struggled to manage its operations in a post-pandemic world.
  • PayPal plans to cut costs by $900 million to increase profitability and shareholder value.
  • Elliott Management, the hedge fund activist investor group, announced that it has invested $2 billion in PayPal.

PayPal Holdings Inc. ($PYPL) operates an extremely popular digital payments platform for merchants and consumers looking to make digital or mobile payments anywhere in the world. If you’ve been online before, chances are you’ve used PayPal before, or at some point stumbled upon the payment processing platform.

PayPal is a pioneer in digital payments, and the company has had to outlast numerous competitors over the years to get where it is today.

PayPal was spun off from eBay in July 2015, and PayPal stock has served its shareholders handsomely over the years. Although PayPal reported a net loss for the second quarter of 2022, many analysts are rating 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 processes transactions worldwide. The company is best known for raising money and handling various financial transactions. The company allows you to raise funds to exchange goods and provides merchants with payment services. Most of us heard about PayPal from eBay because it was the auction site’s primary payment processing method for years. If you’ve ever completed a transaction online, there’s a good chance you’ve used PayPal.

You may also have noticed that they charge you transaction fees. These fees aren’t that big of a deal until you run an online business. The company generates revenue from transaction fees charged for processing payments worldwide. Even though it’s slowly becoming easier to send money around the world, many countries and businesses still rely solely on PayPal for its accessibility and security.

With 429 million active users worldwide, it’s safe to say PayPal isn’t going away anytime soon as the company’s ventures into cryptocurrency payments and apps like Venmo become more common for simple financial transactions.

How PayPal makes money

The company doesn’t thoroughly break down every aspect of making money. You have transaction revenues and revenues from other value-added services.

Transaction Revenue

These are the transaction fees that merchants and consumers are charged for each transaction. These are the fees you see when you buy or receive money online. Fees are percentage based, so larger purchases come with higher fees.

PayPal also brings in money through currency conversion when processing cross-border transactions. With many users exchanging money around the world, PayPal can generate a lot of revenue from 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 delve more into cryptocurrency in recent years.

Revenue from other value-added services

This revenue comes from partnerships, referral fees, subscription fees, gateway fees, and other merchant and consumer services. In addition, the Company earns revenue from interest and fees earned on its portfolio of loan receivables, along with interest earned on certain assets underlying customer balances.

Profit and Balance Sheet Trends

PayPal announced its second quarter results on August 2, 2022. The quarterly results were stronger than originally expected by conservative Wall Street pundits. PayPal reported revenue of $6.81 billion for the quarter. This was a 9% increase from the second quarter of last year. PayPal reported a net loss of $341 million for the quarter. This was the first unprofitable quarter PayPal reported since the early months of 2014.

It’s worth noting that PayPal shares are down 54% year-to-date when it announced its second-quarter results. The company delivered strong financial results during the pandemic as there was an online shopping boom and many people increased online consumption in general. However, according to many experts, the company is struggling to adapt to life after the pandemic.

In response to its first net loss in years, the company expects to cut expenses by $900 million in 2022 and $1.3 billion in 2023 through cost-cutting measures. These moves are expected to make the company profitable as they make better use of capital to increase shareholder value.

Cash, cash equivalents and investments as of June 30, 2022 totaled $15.6 billion. Total assets were $77.81 billion (a 2.64% increase from the previous quarter). Total liabilities were $54.08 billion (down 5.15% sequentially).

Thanks to Venmo’s growth, PayPal net added about 400,000 new active accounts in the second quarter ended June 30. The company had 429 million active accounts as of the end of June, of which 90 million were 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 approximately 8 million shares of its common stock in the second quarter to return $750 million to shareholders.

What’s next for PayPal?

Some analysts have upgraded their ratings on PayPal stocks to a ‘buy’. Raymond James analyst John Davis believes PayPal stock could soar as much as 30%. But it’s difficult to speculate how much PayPal stock can rise given the overall stock market’s volatility of late on recent inflation reports and recession fears.

We’ll wait and see how the cost-cutting initiatives play out over the next year. If the company can make the financial cuts it believes it can, the company becomes much more profitable.

Venmo’s growth is something to watch as the company has been able to net add 400,000 new activity accounts largely because of this app. With tens of millions of users, it should bring more revenue when the world returns to normal. Life after the pandemic means more people will spend and share expenses with friends.

PayPal also confirmed that hedge fund Elliott Management has invested $2 billion and that they have reached an information-sharing agreement to increase the value. Some analysts are supporting the move, believing that having a hard-line activist investor as a shareholder could force the company to focus on improving margins. With PayPal stock reporting a lower adjusted earnings of 93 cents per share for the second quarter, investors are hoping 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 fight with block ($SQ) as they compete for the cryptocurrency space. Many digital payment services are working on ways to accept cryptocurrencies as they become more popular.

To top it off, PayPal also announced that Electronic Arts’ Blake Jorgensen would be its new chief financial officer.

PayPal stock opened at $96.76 on September 14, 2022 with a one-year price target of $120.44. The stock has a one-year range of $67.58 to $285.75, so it’s clear that the stock has been volatile of late as the company struggled with post-pandemic operations and general market conditions.

Building a resilient investment portfolio

While many analysts currently rate PayPal stock as a buy, that doesn’t mean it’s the best move for your portfolio. We all have unique goals with different time horizons.

If you’re interested in how to invest your money in times of high inflation and general market uncertainty, take a look at Q.ai’s Inflation Kit to protect your investments. Better still, you can always turn on portfolio protection to protect your profits and reduce your losses, no matter what industries you invest in.

bottom line

PayPal is a giant in the digital payment processing industry. We’re almost to the point where everyone expected to have used PayPal. As Venmo continues to grow in popularity, it will be interesting to see how transaction revenue increases for the company. Now we just have to see how PayPal partners with Elliott Management as they focus on cutting costs and improving profitability. We can see why many analysts are rating this stock as a Buy lately.

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