Yesterday was a tough day for PayPal (NASDAQ:PYPL) shareholders. The stock fell almost 25% to close just above $132, wiping tens of billions of dollars off the company valuation. The release of quarterly results was the main driver behind this fall, but the size of the tumble has caught a lot of people’s eyes. Is the PayPal share price now at a bargain level that I should take a look at?
Results miss expectations
Firstly, let’s consider the results. Net revenues came in at $6.9bn, growth of 13% year-on-year. For the full-year, revenue grew by 17%. Operating income for the quarter also grew by 11% on the same quarter last year, at $1.1bn.
This all seems positive, but two parts led to the move lower in the PayPal share price. Firstly, the results weren’t as good as the market was expecting. For example, let’s say I was expecting revenue to grow by 50% and it actually grew by 13%. I’d be unhappy in this scenario. On the flipside, if I was expecting revenue to fall and it grew by 13%, I’d be overjoyed. So the point here is that the results weren’t as good as expected, despite the business still showing growth.
The second part that contributed to the move lower was the revised outlook. For example, for the Q1 2022 period, analysts were expecting non-GAAP earnings per share of $1.16. In the prior year period, PayPal had achieved $1.22. Yet the new revision is set at just $0.87 per share. If I want to get really specific with the numbers, this expected drop in earnings per share is equivalent to 25%, which matches up to the fall in the PayPal share price yesterday.
Finding value in the PayPal share price
One point I’ve flagged in the past with growth stocks like PayPal is that the market places a premium on future earnings. The price-to-earnings ratio is very high for stocks like this one. The reason for this is that investors place more value not on current earnings, but future earnings. If the company grows as quickly as some expect, then these earnings make the stock fairly priced, or even undervalued!
That’s why I think the PayPal share price got hit so hard this week. If earnings are going to be lower in Q1, what does this mean for the rest of 2022 and beyond? Key drivers for the weaker outlook are lower active accounts and lower spending. This is partly due to the pandemic, given that PayPal is a key online payments facilitator. With people now out and about more, demand is perhaps likely to wane.
Further damage is being done by the fact that eBay is now paying sellers directly, not using PayPal as its main service provider.
On balance, I do think that the correction in the PayPal share price makes sense. I’m also not keen to invest right now until the dust has settled. Until the company provides clear direction on the strategy for growth post-pandemic and post-eBay, I think I can find better options.
Jon Smith has no position in any share mentioned. The Motley Fool UK has recommended PayPal Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
