Last Wednesday, PayPal shares fell almost 25%, hitting a 21-month low of $132.57 and losing nearly $50 billion of market capitalisation. At the time of writing this, PayPal shares are trading at about $120.
Like many tech companies, PayPal saw an influx of new users during the pandemic. It gained a whopping 120 million new users between 2020 and 2021. However, it quickly became clear to the company that those new accounts did not actively use the platform; as such, PayPal did not generate any meaningful business.
PayPal also saw a drop in payment volumes in the last quarter of 2021. The company’s management cited supply chain problems, reduced travel and events due to COVID, removal of government stimulus and inflation as the reasons behind this. Supply chain constraints caused international transaction volumes to shrink because fewer people were buying physical goods, given that it could take months before they would receive their delivery.
Despite this, PayPal did not have a down quarter. It reported $6.92 billion revenue in Q4 2021, a 13.1% increase over Q4 2020, which exceeded analysts expectations by over $50 million. Like Meta, it was not their past performance that had investors worried; it was their future outlook.
PayPal had previously set a medium-term target of reaching 750 million users. To achieve this, last year, they began offering a $10 referral bonus to existing users who signed up a friend with their referral link. The CFO, John Rainey, revealed that the company discovered 4.5 million fake accounts created under this scheme. He also said those accounts affected their ability to meet their revenue forecasts for Q4 2021.
PayPal has now slashed its forecasts for new users and instead, is shifting focus to making already active users spend more. This decision is likely to make many of the people who were drawn towards the platform during the pandemic to fall away.
The company has also adjusted the revenue forecasts it gave a few months ago. In November, PayPal had forecasted an 18% growth in revenue in 2022, but they have now reviewed that growth figure to 15-17%. This is the second consecutive quarter that PayPal has reduced the forecasts they had previously given.
In November, after they published their financial statements for Q3 2021, they reviewed their revenue forecasts causing their share price to plunge 12%. This behaviour will likely cause investors to doubt any forecast management makes in the future.
It is vital to view the drop in PayPal’s shares in light of what is happening in the US economy. The US Federal Reserve will raise interest rates this year which would make other investments outside of stocks more attractive and reduce the funds investors have to invest in stocks. Given this backdrop, any disappointing news from companies is likely to be greeted with a massive drop in stock price as seen with Meta, Spotify and Snapchat, which all declined by over 20%.
The excess cash in the US economy created by different rounds of stimulus has accounted for rapid growth in share prices since May 2020. The end of stimulus and the rise in interest rates means that stocks are likely to see price corrections. However, investors in good businesses will be rewarded richly in the long term.
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