The current environment is negative for technology stocks. Rising interest rates make capital more expensive, while inflation reduces the consumer’s ability to buy the products of companies. Such factors have sent tech stocks plummeting and the fintech pioneer PayPal (PYPL -2.49%) did not escape the trend.
However, PayPal’s business model could actually benefit of current conditions. Here are three reasons why.
1. Income stream based on PayPal transactions
PayPal likes to talk about its extensive ecosystem that encompasses dozens of products that serve both consumers and merchants. Yet despite all the focus on new offerings, transactions have accounted for 92% of PayPal’s revenue so far this year.
Investors should note that for most transactions, PayPal charges users a percentage of the value of the transaction. Therefore, more expensive transactions, fueled by inflation, should increase the company’s revenue.
During the bear market, Paypal has continued to grow its revenue. It reported $13.3 billion in revenue for the first half of the year, growing by just 4%, compared to the same time period in 2021. This is significantly slower than the 18% revenue growth in 2021.
However, CEO Dan Schulman described the second quarter as a “low water mark” for the company. Management forecasts revenue growth of about 10% by 2022. Schulman reiterated these forecasts recently, saying he expects revenue to meet or exceed expectations for the third consecutive quarter. This indicates that revenue growth could soon approach 2021 levels.
2. PayPal coupons
In addition to transactions, PayPal can also help consumers find discounts. With inflation still above 8%, cash-strapped consumers need ways to save money. This should play into the hands of PayPal coupon app Honey, which PayPal acquired in early 2020.
Honey benefits consumers by searching for what it considers to be the best coupons on the Internet for a particular consumer, based on individual tastes. Work with over 30,000 merchants to find discounts and bring them to interested consumers.
This also influences PayPal’s current strategy. After the fourth quarter, PayPal shifted its emphasis from acquiring new customers to increasing engagement with the platform. Thanks to Honey, consumers have one more reason to look for a PayPal-enabled app and spend more through your site, a move that should increase ARPU.
3. PayPal Feedback and Earnings
However, investors have not been enthusiastic about this new approach. When PayPal announced in February that it would focus more on ARPU than attracting new users, it lost a quarter of its value on the next trading day. It would drop significantly more before starting a partial recovery. As a result, it has fallen almost 70% from its all-time high in August 2021.
Although the crash was painful for long-term investors, it now presents a unique opportunity for new investors in fintech stocks. Its price-to-sales ratio has fallen to just over four, bringing the sales multiple to near record lows.
PayPal’s recent earnings are likely partly to blame for the decline. It reported a second-quarter loss of $341 million, generating just $168 million in net income for the first half of the year, down 93% from the same period last year. The company blamed rising transaction fees related to e-commerce payment platform Braintree. Higher credit and transaction losses with a Venmo service offering also contributed to higher expenses.
Despite this challenge, billionaires can’t stop buying the company, including activist investor Elliott Management. Given Elliott’s history, this probably means that PayPal could get help in reducing these high expenses so that profitability can recover.
Consider PayPal Stock
Tech investors should take a closer look at PayPal stock. While not immune to a downturn, its transaction-based revenue model and focus on coupons should protect PayPal and its users from the effects of inflation.
Despite second-quarter losses, the company is likely to get some help from Elliott as revenue continues to rise. These factors should bode well for PayPal in the long run, regardless of what happens with inflation.