PayPal Holdings, Inc. (PYPL) is a leading digital payment company. The company operates a technology platform that allows digital payments on behalf of consumers and merchants worldwide. PYPL offers payment solutions under the names of PayPal, PayPal Credit, Venmo, Xoom, Hyperwallet, Zettle, Honey, Paidy, and Braintree.

The company operates in approximately 200 markets and 100 currencies to allow consumers to send and receive payments.

The digital payment company benefitted mainly from the COVID-19 pandemic, as consumers increasingly moved to digital payments. However, the company’s growth began to slow in the post-pandemic era, aggravated by losing its longtime partner, eBay Inc. (EBAY), to its European rival company, Adyen.

Furthermore, the company’s business got overshadowed by the current economic headwinds, including heightened inflation, growing recession odds, and declining consumer spending.

PYPL reported disappointing financials for the fiscal 2022 second quarter ended June 30, 2022. The company’s non-GAAP operating income declined 21.3% from the prior-year period. Its non-GAAP net income and net income per share declined by 20.8% and 19.1% year-over-year, respectively. In addition, PYPL’s key growth rates decelerated significantly over the past year.

The company’s number of active accounts grew 6% year-over-year to 429 million in the second quarter versus 16% year-over-year growth in the prior-year period. Its total payments volume (TPV) grew 13% year-over-year, compared to 36% in the prior-year quarter. Also, its transactions growth decelerated from 27% to 16% year-over-year in the second quarter.

Susquehanna analyst James Friedman recently downgraded PYPL to Neutral from Buy and lowered the price target from $115 to $110. In a client report, Friedman said, “Braintree is quickly gaining share within PYPL's total payment volume, creating negative leverage from the mix. Braintree will likely continue driving PYPL, so its unit economics may drag on PYPL consolidated results.”

PYPL has plunged 20.1% in price over the past six months and 53% year-to-date to close the last trading session at $91.63. It is currently trading 67.3% below its 52-week high of $279.95, which it hit on September 23, 2021.

Here is what I think could influence PYPL’s performance in the upcoming months:

Deteriorating Financials

For the second quarter of fiscal 2022, PYPL’s operating expenses increased 18.2% year-over-year to $6.04 billion. Its non-GAAP operating income decreased 21.3% year-over-year to $1.30 billion. Its non-GAAP net income declined 20.8% from the year-ago value to $1.08 billion.

Furthermore, the company’s non-GAAP net income per share amounted to $0.93, down 19.1% year-over-year. Cash outflow from investing activities came in at $3.92 billion, up 256.3% year-over-year.

Weak Growth Prospects

Analysts expect the company’s revenues to increase 10.5% year-over-year to $6.83 billion in the fiscal 2022 fourth quarter (ending September 2022). However, the consensus EPS estimate of $0.96 for the ongoing quarter indicates a 13.9% decline from the same period in 2021. Furthermore, analysts expect PYPL’s EPS for 2022 (ending December 2022) to decline 14.6% from the previous year to $3.93.

Low Profitability

PYPL’s trailing-12-month gross profit margin of 43.47% is 13.7% lower than the industry average of 50.35%. Its trailing-12-month ROTC of 2.64% is 3.7% lower than the industry average of 2.74%. In addition, the stock’s trailing-12-month asset turnover ratio of 0.35% is 45.3% lower than the 0.64% industry average.

Frothy Valuation

In terms of forward non-GAAP P/E, PYPL’s 23.58x is 39.6% higher than the 16.89x industry average. Its 3.97x forward EV/Sales is 52.7% higher than the 2.60x industry average. Likewise, the stock’s forward EV/EBITDA of 16.91x is 38.8% higher than the 12.18x industry average.

In addition, PYPL’s 3.94x Price/Sales is 56.3% higher than the industry average of 2.52x. Also, the stock’s forward Price/Book of 5.22x is 32.6% higher than the 3.94x industry average.

POWR Ratings Reflect Bleak Prospects

PYPL has an overall rating of D, which translates to Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. PYPL is ranked #43 out of 49 stocks in the D-rated Consumer Financial Services industry.

Beyond what I have stated above, we have also given PYPL grades for Growth, Sentiment, Quality, Value, Stability, and Momentum. Get all PYPL ratings here.

Bottom Line

Online payment company PYPL reported disappointing second-quarter results. Moreover, analysts seem bearish on the company’s growth prospects as it is expected to continue suffering from current macroeconomic headwinds, such as high inflation, interest rate hikes, and shifts in consumer spending patterns.

Given the company’s poor financials, bleak earnings growth prospects, higher-than-industry valuation, and low profitability, 2022 may not be the year for PYPL’s stock to recover. So, we think it could be wise to avoid the stock now.

How Does PayPal Holdings, Inc. (PYPL) Stack Up Against its Peers?

PYPL has an overall POWR Rating of D. One could also check out these other stocks within the Consumer Financial Services industry with a B (Buy) rating: Regional Management Corp. (RM), Ezcorp Inc. CI A (EZPW), and OneMain Holdings, Inc. (OMF).

PYPL shares rose $0.96 (+1.05%) in premarket trading Wednesday. Year-to-date, PYPL has declined -50.91%, versus a -17.77% rise in the benchmark S&P 500 index during the same period.

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.

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