Digging Into The Digital Payments Giant

Key Takeaways

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

PayPal Holdings Inc. ($PYPL) operates a highly popular digital payment platform for merchants and consumers looking to make digital or mobile payments globally. If you’ve been online for any time, you’ve likely used PayPal or encountered the payment processing platform at some point.

PayPal is a pioneer in the digital payments space, and the company had to outlast numerous competitors over the years to make it to where they are today.

PayPal spun off from eBay in July of 2015, and the PayPal stock has returned generously for its shareholders over the years. Even though PayPal reported a net loss for the second quarter of 2022, many analysts consider this stock a buy. Let’s take a closer look at PayPal’s stock.

What is PayPal’s Business?

PayPal is a popular digital payment services 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 main payment processing method for years. If you’ve ever completed a transaction online, then there’s a good chance that you used PayPal.

You might also have noticed that they charge you transaction fees. These fees aren’t such a big deal until you start running an online business. The company generates revenue through transaction fees charged for handling payments globally. Even though it’s slowly becoming easier to send money across the globe, 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 that PayPal isn’t going anywhere soon as the company’s ventures in cryptocurrency payments and apps like Venmo become more commonplace for simple financial transactions.

How PayPal Makes Money

The company doesn’t thoroughly break down every aspect of how they make money. They have transaction revenue and revenue from other value-added services.

Transaction revenues

These are the transaction fees charged to merchants and consumers for every transaction. They’re the fees you see when you purchase or receive money online. The fees are a percentage, so the larger purchases will come with heftier fees.

PayPal also brings in money through currency conversion when handling cross-border transactions. Since many users exchange money across the world, PayPal can generate lots of revenue through currency conversion.

PayPal charges additional fees for instant transfers of funds from a PayPal or Venmo account into a debit card or bank account as well as fees to facilitate the buying and selling of cryptocurrencies. The company has started getting more into cryptocurrency over the past few years.

Revenues from other value-added services

This revenue comes from partnerships, referral fees, subscription fees, gateway fees, and other services provided to merchants and consumers. On top of this, the company brings in revenue from interest and fees earned on its loans receivable portfolio along with the interest earned on certain assets underlying client balances.

Profit and Balance Sheet Trends

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

It’s worth noting that PayPal shares were down 54% year-to-date around the time that they announced the results for the second quarter. 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, the company has struggled to adapt to life post-pandemic, according to many experts.

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

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

Thanks to the growth of Venmo, PayPal added about 400,000 net new active accounts in the second quarter that ended on 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 an annual net income of $4.168 billion, a decrease of 0.79% from 2020.

The company also repurchased about 8 million shares of common stock in the second quarter to return $750 million to stockholders.

What’s next for PayPal?

Some analysts have upgraded their ratings for PayPal stock to a buy. Raymond James analyst John Davis feels that PayPal stock can rally up to 30%. But it’s difficult to speculate on how much the PayPal stock can increase because the stock market as a whole has been volatile lately due to the recent inflation reports and fears of a recession.

We’ll wait to see how the cost-cutting initiatives play out over the next year. If the company can make the financial cuts that they believe they can, then the company will become much more profitable.

The growth of Venmo is something that we should track since the company was able to add 400,000 net new activity accounts mainly due to this app. With tens of millions of users, it should bring in more revenue as the world returns back to normal. Post-pandemic life means more people will be spending money and splitting expenses with friends.

PayPal also confirmed that the hedge fund Elliott Management has $2 billion invested and that they have entered an information-share agreement to increase value. Some analysts support this move because they believe that having a hard-charging activist investor as a shareholder could force the company to focus on improving margins. With PayPal stock reporting a lower adjusted profit of 93 cents per share for the second quarter, investors are hopeful that the activist investor firm will help make tough decisions to make the company more profitable moving forward.

We should also pay attention to Paypal’s battle with Block ($SQ) as they compete for the cryptocurrency space. Many digital payment services are working on ways to accept cryptocurrency as it becomes more popular.

To top things off, PayPal also announced that Blake Jorgensen, from Electronic Arts, would 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 one year range of $67.58 – $285.75, so it’s clear that the stock has been volatile recently as the company struggled with post-pandemic business operations and overall market conditions.

Building a resilient investment portfolio

Even though many analysts are considering PayPal stock a buy right now, it doesn’t mean that this is 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 during times of high inflation and overall market uncertainty, you may want to take a look at Q.ai’s Inflation Kit to protect your investments. Better still, you can activate Portfolio Protection anytime to protect your gains and reduce your losses, no matter what industries you invest in.

Bottom line

PayPal is a giant in the digital payments processing industry. We’re almost at the point where everyone’s expected to have used PayPal. With Venmo becoming more popular, it’s going to be interesting to watch how the transaction revenue increases for the company. Now we just have to see how PayPal works with Elliott Management as they focus on cutting costs and improving profitability. We can see why, as of late, many analysts are considering this stock a buy.

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