We do not believe the 2022 outlook justified the share price collapse. And, excluding reserve release and taxes only, EPS growth is expected to be 12-15%. Excluding the impact of the prior-year reserve release alone (125 bps), the decline in EBIT margin is expected to be 55 bps, likely largely attributable to the loss of higher-margin eBay volumes. Excluding eBay, the expected growth rates are 21-24% in TPV and 19-21% in revenues. The final volume losses from eBay's ( EBAY) migration to Adyen ( OTCPK:ADYEY) as its payment processor (since July 2020), prior-year credit reserve releases, and currency are all expected to be headwinds in 2022.Īdjusted to exclude these, the outlook would represent solid progress if achieved. Source: PayPal results presentation (Q4 2021). 24.8% in 2021), and an EPS growth of flat to 3% (all figures are non-GAAP): The new outlook includes a 19-22% growth in TPV, a 15-17% growth in revenues, an EBIT margin of 23% (vs. PayPal's new 2022 outlook is below its mid-term target but still solid. However, management's new 2022 outlook has significantly lower growth than its 2020-25 CAGR targets. Source: PayPal investor day presentation (Feb-21) annotated by Librarian Capital. Dan Schulman, PayPal CEO ( Q4 2021 earnings call)
#Paypal stock free#
We continue to believe that our revenue and earnings growth rates as well as our free cash flow objectives are achievable in the outyears of the period contemplated in our medium-term guidance." Nonetheless, management reiterated other 2025 financial targets: NNAs are expected to revert to the pre-COVID level of 30-40m a year "over time". Management now intends to let these churn and focus on driving up engagement instead. The reason behind the change is that PayPal's much higher NNAs since the pandemic have included accounts that end up generating insufficient returns, due to lower engagement and higher retention costs. PayPal is abandoning its target of 750m Active Accounts by 2025, and now expects only 15-20m NNAs in 2022, far lower than in prior years: We believe the biggest disappointment in Q4 2021 results was the change in strategy, moving away from the focus on NNAs. We believe the qualitative reasons in our investment case remain valid, unaffected by anything within PayPal's Q4 2021 results. The 2025 Free Cash Flow ("FCF") target is $10bn+, doubling from $5.0bn in 2020 (FCF as defined by management, which excludes stock-based compensation). PayPal's margin expansion potential in future years is not fully appreciated by investors, as management has chosen to rapidly increase investmentsĪs of its February 2021 investor day, PayPal is targeting a 2020-25 EPS CAGR of 22%, powered by a 15% CAGR in Active Accounts, a 25% CAGR in Total Payment Volume ("TPV"), and continuing EBIT margin expansion.and the U.K., which were historically 65% of revenues (in 2019) There is significant potential in new geographies, beyond the U.S.Source: PayPal results presentation (Q4 2020). PayPal also has a long-term vision of building an integrated payments ecosystem that includes both online and in-store purchases, payments (including P2P and B2C), consumer rewards, Buy Now Pay Later, etc.As a two-sided payment platform with visibility over both parties in every transaction, PayPal has key advantages in data, speed, security, etc.Payment networks are great businesses, thanks to their mission-critical nature, network effect, recurring revenues, natural pricing power, and operational leverage there is a structural shift to electronic payments.Our investment case consists of the following: Our reduced forecasts indicate a total return of 157% (27.3 % annualized) return by 2025 year-end, and we reiterate our Buy rating. PayPal is now trading on 27.3x non-GAAP 2021 EPS (and 35.5x GAAP EPS). We continue to believe PayPal possesses unique advantages that will enable it to benefit from the continuing shift to electronic payments. However, 2025 revenue, EPS, and cash flow targets were reaffirmed, and our analysis shows PayPal's recent growth acceleration is real. 2022 financial guidance was also reduced. These cast doubt on PayPal's recent growth. Investors were likely unnerved by a change in strategy, moving away from a focus on Net New Actives ("NNAs"), guiding to a much lower NNA in 2022 and restating some recent NNAs as "illegitimate". Librarian Capital PayPal Rating History vs. PYPL stock is now 9.5% down since our upgrade, with a 46.2% decline since the end of 2020: We upgraded our rating on PayPal to Buy in May 2020. PayPal Holdings, Inc.'s ( NASDAQ: PYPL) share price has fallen 28.3% since Tuesday (February 1), when Q4 2021 results were released after markets closed.