An inside look at the digital payments giant

key takeaways

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

PayPal Holdings Inc. ($PYPL) operates a very popular digital payments platform for merchants and consumers who want to make digital or mobile payments worldwide. If you’ve been online, you’ve probably used PayPal or encountered a payment processing platform at some point.

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

PayPal spun off from eBay in July 2015, and PayPal’s stock has paid off handsomely for its shareholders over the years. Even though PayPal reported a net loss for the second quarter of 2022, many analysts see the stock as a buy. Let’s take a closer look at PayPal stock.

What is PayPal’s business?

PayPal is a popular digital payment service platform that processes global transactions. The company is known for collecting money and processing all kinds of financial transactions. The company allows you to receive money in exchange for goods and provide payment services to merchants. Most of us have heard of PayPal through eBay, as it was the primary payment processing method for auction sites for many years. If you’ve ever completed a transaction online, chances are you’ve used PayPal.

You may also notice that they charge you transaction fees. These fees are not a big deal until you start running an online business. The company generates revenue from transaction fees charged for processing payments globally. Although it is getting easier to send money around the world, many countries and businesses still rely entirely on PayPal for its accessibility and security.

With 429 million active users worldwide, it’s safe to say that PayPal isn’t going away anytime soon, as the company’s investments in cryptocurrency payments and apps like Venmo become more commonplace for simple financial transactions.

How Paypal Makes Money

The company doesn’t thoroughly break down every aspect of how they make money. They have transaction revenue and revenue from other value-added services.

transaction revenue

These are the transaction fees charged to merchants and consumers per transaction. They are the fees you see when you buy or receive money online. The fee is a percentage, so larger purchases will come with higher fees.

PayPal also brings in money through currency exchange when processing cross-border transactions. Since many users exchange currencies around the world, PayPal can generate a lot of revenue from currency exchange.

PayPal charges additional fees for instant 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. Over the past few years, the company has started to venture more into cryptocurrencies.

Other value-added service income

This revenue comes from partnerships, referral fees, subscription fees, gateway fees, and other services provided to merchants and consumers. Most importantly, the company’s revenue comes from interest and fees earned on its loan receivables portfolio, as well as interest earned on underlying assets on certain customer balances.

Profit and Balance Sheet Trends

PayPal announced its second-quarter earnings results on August 2, 2022. The quarterly results were stronger than initially expected by conservative Wall Street experts. PayPal reported revenue of $6.81 billion for the quarter. This was a 9% increase from the second quarter of last year. PayPal reported a net loss of $341 million for the quarter. It was the first unprofitable quarter that PayPal has reported since early 2014.

Notably, when they announced their second-quarter results, PayPal’s stock was down 54% year-to-date. The company delivered strong financial results during the pandemic, as many people generally increased their online spending due to a boom in online shopping. However, according to many experts, the company has struggled to adapt to post-pandemic life.

In response to its first net loss in years, the company expects to cut spending by $900 million in 2022 and $1.3 billion in 2023 through cost-cutting moves. These moves are expected to make companies profitable as they make better use of 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 (up 2.64% from the previous quarter). Total liabilities were $54.08 billion (down 5.15% sequentially).

PayPal added about 400,000 net new active accounts in the second quarter ended June 30, thanks to Venmo’s growth. The company had 429 million active accounts at the end of June, 90 million of which were Venmo accounts.

PayPal reported 2021 revenue of $25.4 billion and annual net income of $4.168 billion, down 0.79% from 2020.

The company also repurchased approximately 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 PayPal stock to buy. Raymond James analyst John Davis thinks PayPal stock could rise as much as 30%. But it’s hard to speculate on how much PayPal’s stock will rise, as the entire stock market has been volatile lately due to recent inflation reports and fears of a recession.

We’ll see how next year’s cost-cutting moves play out. If the company can make the financial cuts they think they can, then the company will become more profitable.

Venmo’s growth is something we should be tracking, as the company was able to add 400,000 net new active accounts, largely due to the app. With tens of millions of users, it should bring in more revenue as the world returns to normal. Post-pandemic life means more people will spend and split expenses with friends.

PayPal also confirmed that hedge fund Elliott Management has invested $2 billion and has signed an information-sharing agreement to add value. Some analysts support the move because they believe having a hard-line activist investor as a shareholder could force the company to focus on improving profit margins. As PayPal stock reported a lower second-quarter adjusted EPS of 93 cents, investors hoped that the activist investor firm would help make tough decisions that will make the company more profitable going forward.

We should also keep an eye on Paypal’s battle with Block ($SQ) for the cryptocurrency space. As cryptocurrencies become more popular, many digital payment services are working on ways to accept them.

On top of that, PayPal also announced that Blake Jorgensen from Electronic Arts will be its new chief financial officer.

PayPal stock opened on September 14, 2022, with an opening price of $96.76 and a one-year price target of $120.44. The stock has a one-year range of $67.58 to $285.75, so it’s clear that the stock has been volatile lately as the company struggles with post-pandemic business operations and general market conditions.

Build a Resilient Portfolio

While many analysts are considering buying PayPal stock right now, that doesn’t mean it’s the best move for your portfolio. We all have unique goals for different time frames.

If you’re interested in how to invest in times of high inflation and general market uncertainty, you may want to check out Q.ai’s Inflation Toolkit to protect your investments. Even better, no matter what industry you invest in, you can activate Portfolio Protection at any time to protect your gains and reduce your losses.

bottom line

PayPal is a giant in the digital payment processing industry. We’ve gotten to the point where almost everyone expects to use PayPal. As Venmo becomes more popular, it will be interesting to see how the company’s transaction revenue increases. Now we just have to see how PayPal works with Elliott Management as they focus on cutting costs and improving profitability. We can see why many analysts are considering buying this stock lately.

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