Late Tuesday, shares of PayPal Holdings Inc. fell sharply after the company said it was going to make less money than expected in the third quarter, which was its holiday quarter.
(After-hours): Shares were down about 18% on Tuesday, but Chief Financial Officer John Rainey said there were a lot of reasons for a “more cautious” forecast. The company is feeling the effects of rising prices, a drop in consumer confidence, and a shortage of goods. Lower-income customers have felt the effects more.
For the first half of the year, the company also expects more problems from eBay Inc. EBAY, +0.68%, which has been moving money away from PayPal PYPL, +2.24 percent as part of its own payment changes.
PayPal thinks that revenue will grow about 6% in the first quarter, or 14% if eBay isn’t included. The FactSet consensus is that PayPal will make $6.76 billion in sales in the third quarter, which would be about 12% more than the $6.03 billion it made in the same period last year.
The company also expects first-quarter adjusted earnings per share to be about 87 cents, while FactSet expects them to be $1.16.
It also turns out that PayPal is changing its strategy for how it grows its user base and keeps them. This move will make it less optimistic about how many people will sign up for new accounts. Instead, the company will focus on “higher-value” accounts that are more active on the PayPal platform. This will show how changes in users are affecting the company’s finances. The average revenue per user (ARPU) metric will start to be used to do this.
The company used to run “incentive-based programmes” to try to get people who had been away from PayPal to “reengage” with the service again, but these mostly didn’t work, CEO Dan Schulman said on the earnings call.
Spending money on people who aren’t already in the base and aren’t interested in it becomes more expensive and doesn’t help us make more money over time, he said.
Rainey says the company used to predict that 750 million people would be using the service in the next few years, but that forecast is no longer “appropriate.” For 2022, the company thinks it will add 15 million to 20 million active accounts. FactSet thought it would add more than 50 million.
“To be very clear, this is a choice that we made,” he said. “We could spend more money and speed up our net-new-active trajectory, but we think there are better ways to reach our financial goals.”
Darrin Peller, an analyst at Wolfe Research, said that he thought there was “some downside risk” to the company’s forecasts before the report came out. “The magnitude was materially more pronounced,” he said.
People may be worried about the company’s long-term growth targets and competitive dynamics, but “we believe some of this is due to the company’s strategy of focusing more on ARPU [average revenue per customer] than on adding NNAs [net new active accounts]. We think investors may be more concerned about the company’s competitive dynamics and its long-term growth targets.”
During the pandemic, PayPal had a big rise, but this report was a “return to earth.” Dan Dolev, a Mizuho analyst, said that PayPal’s disappointing numbers “may have hidden a hidden bottom.”
That growth in total payment volume, excluding eBay and peer-to-peer volume, was faster than it was in the third quarter, he said. PayPal’s number of transactions per account also “sped up dramatically.”
Executives at PayPal were still optimistic about the long-term prospects of the company.
After the eBay transition, which we have five more months to go through, “you can see a very consistent and strong storey about the core business,” Schulman said on MarketWatch.
During the fourth quarter, the company made $801 million, which works out to 68 cents a share, down from $1.56 billion, which worked out to $1.32. When PayPal made money on a “adjusted” basis, it earned $1.11 per share, up from $1.08 a share a year ago. FactSet thought it would earn $1.12 per share.
PayPal’s revenue for the fourth quarter came in at $6.9 billion, which was the same as the FactSet consensus figure. PayPal made $6.1 billion in quarterly sales last year.
PayPal’s annual revenue now stands at $25.4 billion for 2021, up from $21.5 billion a year ago.
For the fourth quarter, the company had $340 billion in total payments. That’s a little less than the FactSet consensus figure was for $345 billion, but it’s still below. It shows how much money has been exchanged on PayPal’s platform.
At the end of 2021, PayPal had more than 426 million active users.
Schulman told MarketWatch that PayPal’s new app was getting more attention than he expected. It focuses on a wider range of financial-services tools. Users who saw a deal on PayPal’s shopping hub are more likely to go to the merchant’s site after seeing it on the app. This is because the app has been changed.
When it comes to the whole year, the company thinks that total payment volume will reach $1.5 trillion, and that revenue will top $29 billion. There was $1.53 trillion worth of TPV and just over $30 billion worth of sales that FactSet tracked.
Rainey said that during PayPal’s last earnings call, the company said that its revenue growth for 2022 would be about 18 percent. The company’s current projection is for 15 percent to 17 percent growth.
In his letter, he said that “We have a great business, but we can’t avoid the changes in the economy.” If things like inflation and supply pressures go down, growth could be at the high end of the range. If they go up, growth could be at the low end.
For 2022, PayPal expects to earn $4.60 per share to $4.75 per share in adjusted earnings, which is about the same as what they earned in 2017. The FactSet consensus is that adjusted earnings will be $5.21, which is about the same as what people expect.
PayPal thinks that its revenue growth will pick up as the year goes on. That means Schulman thinks that the “lapping noises” will stop in the third quarter, and that PayPal can still make money this year.