As one of the early pioneers of the financial technology (fintech) industry, PayPal Holdings (PYPL 1.48%) has rewarded its shareholders in fantastic style since it was spun off from eBay in July 2015. Even after falling 66% last year, shares of the mobile payment leader are still up around 160% all-time. However, as evidenced by its latest share price move, the company has hit a snag in recent quarters.
Unlike the vast majority of fintech companies today, PayPal has historically been a profit-making machine. That changed in its second quarter: The mobile payment company suffered a net loss under generally accepted accounting principles (GAAP) for the first time since the first quarter of 2014. That’s a revelation, to say the least, and certainly something that investors should monitor closely over the coming quarters. In the end, will the fintech giant bounce back, or are its best days in the past?
A second quarter (not) to remember
PayPal stock has surely fallen victim to the technology sell-off related to high inflation and rising borrowing costs, but the fintech company faces its own problems. In its second quarter, the company reported a net loss of $341 million, a sharp turnaround from its profit of $1.2 billion in the same quarter a year ago. Fortunately, it generated a positive operating profit of $764 million, although it was down 32.2% year over year. So what happened?
Two of PayPal’s operating expenses, transaction costs and credit and transaction losses, saw significant increases from a year ago. The company’s transaction expenses grew 21% year over year to $3 billion, which is equal to 45% of total sales. Management traced the rise to Braintree, a mobile card payment system for e-commerce businesses. Braintree, which PayPal acquired in 2013, generally has higher expenses than the fintech’s other services. For starters, management cited a changing mix of funds, specifically more normalized debit card usage compared to last year, also to increased transaction fees. The company’s credit and transaction losses also increased 165% year over year to $448 million due to ongoing insolvency proceedings and fraud schemes related to its Venmo service offering.
How does PayPal plan to solve its problems?
While investors should watch the company’s earnings and expenses closely in the coming quarters, I think PayPal will rebound. On its second-quarter earnings call, management was very clear about plans to reduce operating costs. CEO Dan Schulman discussed leveraging its scale to drive cost reductions across its supplier base. The company has also reduced its workforce and plans to change its real estate footprint by hiring employees at lower-cost locations.
As a result, the fintech leader believes it can achieve its savings target of $900 million in transaction and operating expenses by 2022. It also believes its initiatives will save $1.3 billion by 2023. While execution is very different than planning , it’s clear that PayPal is prioritizing cutting costs and increasing profits in the coming years. It will be interesting to see how the company’s cost-saving plans pan out, but it looks like the company is headed in the right direction.
Should Investors Buy PayPal Stock?
I think PayPal will bounce back mightily. Not only is the fintech leader well positioned with 429 million active users and a cash and short-term investment position of $9.3 billion, but I love where the head of management is at with their ambitious cost-cutting plans. . With a forward price-to-earnings ratio of just over 20 and a price-to-sales multiple of 4.3, PayPal stock appears to have reached a good entry point for long-term investors.
Over the past five years, fintech stocks have posted an average price-to-earnings ratio of 57.2 and a price-to-sales multiple of 8.8. But regardless, I think PayPal’s rich history of profitability will continue for years to come, and long-term investors should be confident that the stock will deliver out-of-market returns.
lucas meindl has positions in PayPal Holdings. The Motley Fool has positions and recommends PayPal Holdings. The Motley Fool recommends eBay and recommends the following options: October 2022 $50 Short Calls on eBay. The Motley Fool has a disclosure policy.