In early morning trading today, shares of PayPal are off around 25% following the company’s earnings report yesterday evening. Investors did not like what the company had on offer.
TechCrunch focuses on private companies and private markets. But at times, public companies can help us better understand what is going on in larger markets where startups compete. Such is the case with PayPal, which has an enormous footprint in the consumer fintech space through its products like Venmo.
If PayPal is doing well, we can infer that the larger consumer fintech market is doing pretty OK with reasonable confidence. And if PayPal is struggling, we need to understand why. After all, if something negative happens to PayPal, it could also be happening to startups with similar, related, or competing business models. (We’ve executed similar looks at fintech earnings before, scrying for startup hints.)
So. Let’s recap PayPal’s results, its guidance, and what drove investors to delete around a quarter of the company’s value overnight.
PayPal’s Q4 warning
PayPal’s fourth quarter saw total payment volume (TPV) at the company rise to $339.5 billion, up 23% compared to the year-ago period, resulting in revenues of $6.9 billion, up 13% on a year-over-year basis. From those figures, PayPal managed operating income of $1.5 billion, flat from the year-ago quarter, and cash flow improvements.
So far you are likely struggling to see why PayPal was so harshly treated this morning. Those numbers look just fine, yeah? Keep reading.
In its fiscal 2021, PayPal grew its TPV by 31%, its revenues by 17%, and added 48.9 million net new active accounts, or NNAs. What’s ahead for the company in its fiscal 2022? The following:
- TPV growth of 19% to 22%
- Revenue growth of 15% to 17%
- 15 million to 20 million NNAs
That’s a rapid deceleration from fiscal 2021 results. And the near-term news is even worse, with PayPal anticipating a meager 6% revenue growth in the current quarter. The company’s pandemic boom, it appears, has fully crested, now a historical note more than a continuing operating condition.
Investors, who had bid PayPal from the $110 to $120 per-share range before March 2020 to over $300 per share last summer, are now paying around $130 for its stock. PayPal has therefore given back effectively all the valuation gains it saw during COVID-19.
For related startups, this is brutal. A key comp on the public markets is seeing its value decline rapidly in light of slowing results. That’s not a recipe for brewing up venture capital FOMO. Instead, it’s a big warning flag for private-market investors that anticipated exit multiples for their portfolio companies are in decline.
Commentary, detail
Pulling from a transcript of the company’s earnings call, we can see more about how the company is struggling to match prior growth levels. PayPal CEO Dan Schulman said the following during his prepared remarks, for example (emphasis added):
Over time, we obviously still expect to grow our net new actives but more in line with our pre-pandemic levels. At the same time, we fully expect engagement will increase above our current trend lines while we accelerate revenue and EPS growth throughout the year. Our forecast for 2022 is appropriately measured giving — given the difficult comps in the first half and an unpredictable macroeconomic environment.
The NNA point is important. PayPal expects around 20 million low-quality NNAs to churn this year, limiting its upside. I’ve pulled from CFO John Rainey’s comments to help explain why that matters (emphasis added):
We are evolving our customer acquisition and engagement strategy, and we now expect to add 15 million to 20 million net new customer accounts this year. In addition, we no longer believe that the 750 million medium-term account aspiration we set last year is appropriate. I’ll explain. Over the past two years, we’ve added more than 120 million customer accounts to our platform.
But as the CEO said later, not all those additions were high-quality (emphasis added):
First of all, we did put on 122 million NNAs over the last two years, which is obviously substantially more than what our pre-pandemic levels were. And within that, there are always a number that are low engaged or have done one transaction and nothing else. And we drove some programs, incentive-based programs to see if they would reengage and then engage back with the base.
And what we found is that they would do one transaction and then fall dormant again. And so, our view is spending money on lower-value NNAs that are not engaged in the base becomes an increasingly expensive proposition over time and does nothing for our revenue growth. In fact, this year, when we’re saying that we’re going to do 15 million to 20 million, it’s probably going to be about 20 million incremental one-and-done customers that roll off. That does nothing to our revenue.
The CFO also said that the end of its fiscal year was lackluster compared to even results from the first month of the quarter:
October was a strong month buoyed by some expected pull forward in holiday shopping. However, the back half of the quarter was weaker than we expected.
In short, PayPal saw a huge surge in signups during COVID-19, but some of those turned out to be a bit garbage. It now expects some NNAs to bounce. That fact will harm the company’s upcoming NNA adds. For startups, if the PayPal experience translates, some user growth from the pandemic period will prove hollow; this could lead to tough quarters this year when stacked up against big 2021 quarters.
Reading the overall result set from the company, it’s clear that PayPal has matured into a cash-generating giant with a huge consumer footprint. But it is not precisely what investors valued it as: a long-term growth business. Its recent earnings and projections make that clear. So down goes its value. A warning of sorts, then, for consumer fintech companies more generally. The boom is probably over and more normal reality may have returned.
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