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While the broader markets are trading close to record highs, several stocks have lost momentum post Q3 earnings. One large-cap fintech stock that’s down 32% from all-time highs is PayPal (NASDAQ: PYPL).
In Q3 of 2021, PayPal sales rose by 13% year over year to $6.2 billion. These gains were due to a 26% increase in total payments volume which grew to $310 billion. In the last 12-months, total payments volume or TPV surged over $1.2 trillion making PayPal one of the largest fintech companies in the world.
PayPal’s TPV stood at $936 billion in 2020 that included $159 billion from its mobile payment application Venmo. In Q3, Venmo’s TPV grew by 36% year over year.
The company’s cash-generating metrics remained robust as operating and free cash flow rose by 15% and 20% respectively year over year to $1.5 billion and $1.3 billion. This growth allowed PayPal to repurchase shares worth $350 million in the quarter.
Why PYPL stock lost steam recently?
Despite PayPal’s stellar Q3 results, the stock has declined by 22% in the last month. It seems investors were unimpressed by management guidance that forecast revenue between $6.85 billion and $6.95 billion with adjusted earnings of $1.12 per share in Q4. Comparatively, Wall Street forecast sales of $7.24 billion and earnings of $1.27 per share in Q4. In the year-ago quarter, PayPal reported revenue of $6.12 billion and earnings of $1.13 per share.
According to the company’s CEO Dan Schulman, several factors have contributed to PayPal’s conservative guidance for the December quarter which coincides with the holiday season.
Schulman noted, “We are seeing the impact of global supply chain shortages in our merchant base. Consumer confidence has weakened with the absence of stimulus payments. And with the economy reopening, more people may be likely to do their holiday shopping in-store as confidence in delivery logistics is depressed from last year.”
Another reason that worried investors was the 45% decline in payments volume for the eBay marketplace. Further, eBay (NASDAQ: EBAY) is now transitioning to a new managed payment system. But, PayPal may be able to offset the loss in payments volume as it partnered with e-commerce heavyweight Amazon (NASDAQ: AMZN). Now, Amazon customers will use Venmo’s payment solution starting from 2022.
What next for PayPal investors?
Investors should view the dip in PayPal stock as a buying opportunity. PayPal added 13.3 million net new accounts in Q3, bringing the total number of accounts to 416 million. eBay too accounted for just 4% of total payments volume in Q3 and the recent development should not impact PayPal’s top-line significantly in the future.
PayPal leads the digital payment segment and its portfolio of products continue to expand. Now users can send, money as well as invest money on the PayPal platform, while merchants can benefit from services that include payment processing, financing solutions, and fraud management.
PayPal is the most popular digital wallet in North America and Europe and is used by 75% of the top 1,500 merchants. This enormous scale allows the company to benefit from a powerful network effect which will result in strong customer engagement.
PayPal has increased sales from $13 billion in 2017 to $21.5 billion in 2020. Comparatively, its pre-tax income has risen from $2.2 billion to $5 billion in this period. Now, Wall Street forecasts sales to touch $25.5 billion in 2021 and $30.5 billion in 2022 while earnings are forecast to expand from $3.88 per share in 2020 to $5.38 per share in 2022.
Analysts expect PYPL stock to touch $290 in the next 12-months which is 40% above its current trading price.
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