- 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 increase 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 highly popular digital payment platform for merchants and consumers looking to make digital or mobile payments globally. If you’ve been online at any time, you’ve probably used PayPal or encountered a payment processing platform at some point.
PayPal is a leader in digital payments, and the company has had to beat many competitors over the years to reach where it is today.
PayPal split from eBay in July of 2015, and PayPal stock has returned generously to its shareholders over the years. Even though PayPal reported a net loss in the second quarter of 2022, many analysts consider the stock a buy. Let’s take a closer look at PayPal’s stock.
What is PayPal Business?
PayPal is a popular digital payment service platform that handles transactions across the globe. The company is known for collecting money and handling various financial transactions. The company allows you to collect money for exchanging goods and provides payment services to merchants. Most of us have heard of PayPal through eBay because it was the auction site’s main payment processing method for years. If you’ve ever completed an online transaction, there’s a good chance you’ve used PayPal.
You may also have noticed that they charge you a transaction fee. These fees are not such a big deal until you start running an online business. The company generates revenue through transaction fees levied for handling payments globally. Even though sending money around the world is slowly becoming easier, many countries and businesses still rely entirely on PayPal due to accessibility and security.
With 429 million active users worldwide, it’s safe to say that PayPal isn’t going anywhere anytime soon as the company’s forays into cryptocurrency payments and apps like Venmo become more commonplace for simple financial transactions.
how paypal makes money
The company doesn’t completely break down every aspect of making money. They have transaction revenue and revenue from other value-added services.
These transaction fees are charged to merchants and consumers for each transaction. These are the charges you see when you shop online or receive money. The fee is one percent, so large purchases will come with a hefty fee.
PayPal also brings in money through currency conversion while handling cross-border transactions. Since many users exchange money around the world, PayPal can generate a lot of revenue through currency conversion.
PayPal charges additional fees for the instant transfer of funds from a PayPal or Venmo account to a debit card or bank account as well as for facilitating the purchase and sale of cryptocurrencies. The company has started to get more into cryptocurrency over the years.
Revenue from other value added services
This revenue comes from sharing, referral fees, membership fees, gateway fees and other services provided to merchants and consumers. On top of this, the company brings in revenue from interest and fees earned on its debt receivables portfolio, as well as interest earned on certain assets under the client’s balance.
Profit and Balance Sheet Trends
PayPal announced its second quarter earnings results on August 2, 2022. The quarterly results were stronger than what conservative Wall Street experts had originally anticipated. PayPal reported revenue of $6.81 billion for the quarter. This was up 9% from the second quarter of last year. PayPal reported a net loss for the quarter of $341 million. It was the first unprofitable quarter that PayPal reported since the early months of 2014.
It’s worth noting that PayPal’s shares were down 54% year-over-year around the time they announced second-quarter results. The company delivered strong financial results during the pandemic as online shopping boomed and many increased online consumption in general. However, according to several experts, the company has struggled to adapt to life after the pandemic.
In response to a net loss earlier in years, the company expects to reduce expenses by $900 million in 2022 and $1.3 billion in 2023 with cost-cutting steps. These moves are expected to make the company profitable because they better use capital to increase shareholder value.
Cash, cash equivalents, and investments totaled $15.6 billion as of June 30, 2022. Net assets were $77.81 billion (an increase of 2.64% from the previous quarter). Total liabilities were $54.08 billion (down 5.15% from the previous quarter).
Thanks to the growth of Venmo, PayPal added nearly 400,000 net new active accounts in the second quarter ended June 30. The company had 429 million active accounts at the end of June, of which 90 million are Venmo accounts.
PayPal reported revenue of $25.4 billion in 2021, with annual net income of $4.168 billion, a decrease of 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 their ratings to buy for PayPal stock. Raymond James analyst John Davis thinks PayPal stock could rise as much as 30%. But it’s difficult to predict how much PayPal stock could rise because the stock market has been volatile lately due to recent inflation reports and fears of a recession.
We’ll wait to see how the cost-cutting initiatives play out next year. If the company can make the financial cuts they believe they can make, the company will become much more profitable.
Venmo’s growth is something we should be tracking as the company was able to add 400,000 net new activity accounts mainly because of this app. With millions of users, it should bring in more revenue as the world gets back to normal. Life after the pandemic means more people will spend money and share expenses with friends.
PayPal also confirmed that hedge fund Elliott Management has invested $2 billion and that they have entered into an information-sharing agreement to increase the value. Some analysts support the move because they believe that having a hard-charging activist investor as a shareholder may force the company to focus on improving margins. With PayPal stock reporting a low adjusted profit of 93 cents per share for the second quarter, investors expect the active investor firm to help the company make tough decisions going forward.
We should also note PayPal’s battle with Block ($SQ) as they compete for the cryptocurrency space. Several digital payment services are working on ways to accept cryptocurrency as it becomes more popular.
To top things off, PayPal also announced that Blake Jorgensen, from Electronic Arts, will be its new Chief Financial Officer.
PayPal stock opened on September 14, 2022 at $96.76, with a one-year target price of $120.44. The stock has a one-year range of $67.58 – $285.75, so it’s clear that the stock has been volatile lately as the company grapples with post-pandemic trading operations and overall market conditions.
Creating a Flexible Investment Portfolio
Even though 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 with different time horizons.
If you are interested in investing your money in times of high inflation and overall market uncertainty, you may want to take a look Q.ai’s Inflation Kit To protect your investment. Better still, you can activate portfolio security To protect your profits and minimize your losses at any time, no matter what industry you invest in.
PayPal is a giant in the digital payment processing industry. We are almost at the point where everyone is expected to use PayPal. With Venmo becoming more popular, it will be interesting to see how transaction revenue grows for the company. 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, lately, many analysts have been considering buying this stock.
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