Digging Into The Digital Payments Giant

key takeaways

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

PayPal Holdings Inc. ($PYPL) operates a popular digital payment platform for merchants and consumers looking to make digital or mobile payments around the world. If you’ve been online for a while, chances are you’ve used PayPal or come across the payment processing platform at some point.

PayPal is a pioneer in the digital payments space, and the company had to outperform numerous competitors over the years to get to where it is today.

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

What is PayPal business?

PayPal is a popular digital payment service platform that handles transactions around the world. 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 primary payment processing method for years. If you’ve ever completed a transaction online, there’s a good chance you’ve used PayPal.

You may have also noticed that they charge you transaction fees. These fees are not that important until you start running an online business. The company generates revenue through transaction fees charged for handling payments globally. Although it is slowly becoming easier to send money around the world, 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 anytime soon, as the company ventures into cryptocurrency payments and apps like Venmo become more common for simple financial transactions.

How PayPal makes money

The company does not thoroughly break down all aspects of how they make money. They have income from transactions and income from other value-added services.

Transaction revenue

These are the transaction fees charged to merchants and consumers for each transaction. These are the fees you see when you buy or receive money online. Fees are a percentage, so larger purchases will come with higher fees.

PayPal also makes money through currency conversion when handling cross-border transactions. Since many users exchange money around the world, PayPal can generate a lot of income through currency conversion.

PayPal charges additional fees for instant fund transfers from a PayPal or Venmo account to a debit card or bank account, as well as fees to facilitate the buying and selling of cryptocurrencies. The company has started to get more involved in cryptocurrencies in recent years.

Income from other value-added services

These revenues come from partnerships, referral fees, subscription fees, gateway fees, and other services provided to merchants and consumers. In addition to this, the company generates interest and fee income accrued on its loan receivable portfolio along with interest accrued on certain assets underlying client balances.

Earnings and Balance Trends

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

It’s worth noting that PayPal shares were down 54% year-to-date at the time they announced second-quarter results. The company posted strong financial results during the pandemic as there was a boom in online shopping and many people increased online consumption in general. However, the company has struggled to adjust to life after the 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 through cost-cutting measures. 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. 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 prior quarter).

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

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

What’s next for PayPal?

Some analysts have upgraded their ratings on PayPal stock to a buy. Raymond James analyst John Davis believes PayPal shares may rise as much as 30%. But it’s hard to speculate on how much PayPal stock may rise because the stock market as a whole has been volatile lately due to recent inflation reports and fears of a recession.

We will wait to see how the cost reduction initiatives unfold over the next year. If the company can make the financial cuts that it thinks it can, the company will be much more profitable.

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

PayPal also confirmed that the hedge fund Elliott Management has $2 billion invested and that they have signed an information exchange agreement to increase the value. Some analysts support this move because they believe having a tough 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 the activist investment firm will help make tough decisions to make the company more profitable in the future.

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

To top it off, PayPal also announced that Electronic Arts’ Blake Jorgensen would be its new CFO.

PayPal stock opened on September 14, 2022 at $96.76, with a one-year target price of $120.44. The stock has a one-year range of $67.58 – $285.75, so it’s clear the stock has been volatile recently as the company struggled with post-pandemic trading and general market conditions.

Building a resilient investment portfolio

Although many analysts are considering buying PayPal stock at the moment, it doesn’t mean that this is the best move for your portfolio. We all have unique goals with different time horizons.

If you are interested in how to invest your money in times of high inflation and general market uncertainty, we recommend that you take a look at Q.ai inflation kit to protect your investments. Better yet, you can activate portfolio protection at any time to protect your profits and reduce your losses, no matter what industries you invest in.

Bottom line

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

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