Cramer's Investing Club: PayPal earnings disappoint, putting management's credibility on the line

Published Tue, Feb 1 20229:43 PM EST

PayPal (PYPL) reported disappointing fourth-quarter results after the closing bell Tuesday, and the stock got pummeled, sinking roughly 18% in after-hours trading. Revenue grew 13% YoY to about $6.918 billion and edged the expectation of $6.898 billion, according to FactSet. However, adjusted earnings per-share grew by only 4% YoY to $1.11, missing the consensus forecast of $1.12 as higher than anticipated expenses weighed on the results. The cadence of the quarter sounded uneven, with management noting that October was a strong month for them due to some pull-forward of holiday shopping. However, the back half of the quarter was weaker than anticipated, consistent with the reported decline in seasonally adjusted retail sales and consumer spending in December, due to various factors like the Covid omicron variant, rising inflationary pressures, and a lack of government pandemic stimulus money. Bottom line Clearly, this was a tough fourth-quarter for PayPal and one we are quite disappointed in as we thought management's previous comments suggested the worst was behind them. But we flat out were wrong to hold onto this position and we sincerely apologize to all those who have been hurt by it. We were hurt by it too. As we talked about in Tuesday's Morning Meeting , PayPal is a show-me story and this stock will continue to be stuck in the penalty box for quite some time. A stock's price-to-earnings multiple is as much about the effectiveness of management as it is the company's growth rate — and after multiple quarters in a row of disappointment and lower-than-expected guidance (see more about the outlook later), investors are putting less and less faith in management's forecast ability. Key quarterly metrics Total payment volume (TPV), a closely watched metric in the payments space, increased 23% on an FX-neutral basis to $339.5 billion, a miss versus the $343.6 billion the street was looking Notably, Merchant Services TPV , which is TPV ex-eBay Marketplaces came in at $330 billion, a 28% YoY increase on an FX-neutral basis. This is an important factor that speaks to strength of the core underlying business that will continue on as eBay Marketplaces (which now represents less than 3% of TPV) rolls off and is being temporarily (albeit longer than expected) masked by the eBay unwind. Additionally, revenue ex-eBay Marketplaces increased 22% YoY to $6.708 billion, which when compared to the 13% growth rates seen for total revenues, serves to further demonstrate the underlying growth being masked by the well-known eBay unwind currently underway. PayPal added 9.8 million net new active accounts (NNAs), including 3.2 million that were brought on via the acquisition of Paidy, bringing the total number of active accounts to 426 million (+13 YoY) as of the end of the quarter, also a miss versus the 431.35 million expected. Engagement was up with payment transactions per active account increasing 11% YoY to 45.4 in the fourth quarter. Total take rate , which is simply total revenue divided by TPV, of 2.04% was slightly better than expectations of 2%, while the transaction take rate came in at 1.81% "driven by lower eBay volumes, FX fees, and higher share from bill pay partners and large merchants." As for cash flow, operating cash flow came in at $1.76 billion while free cash flow came in at $1.55 billion (+38% YoY), missing expectations of $2.439 billion and $1.778 billion, respectively. Additionally, management took some time to discuss Buy Now, Pay Later (BNPL) dynamics and commented that the services saw $3.2 billion of TPV in the fourth quarter (+325% YoY), representing a $13 billion annual run rate. Since launching, the service has processed 54 million loans spanning 13 million unique consumers 1.2 million merchants. Guidance While the quarter was just fair, it was management's 2022 outlook that crushed the stock after hours Tuesday evening. For 2022, management expects net revenue to increase about 15% to 17% (19% to 21% ex-eBay), and that's below the roughly 18% analysts were forecasting. The earnings outlook wasn't any better, with management forecasting adjusted earnings of $4.60 to $4.75, well below analyst estimates of $5.21. We weren't pleased with some of the important key metrics either. PayPal expects to add about 15 million to 20 million net new active accounts this year, and analysts were forecasting growth of about 55 million. In addition, the company no longer expects to be able to reach 750 million active accounts as part of its medium-term guidance. The reason behind management's tempered net new active account guidance is due to their evolved customer acquisition and engagement strategy. PayPal now plans to focus on sustainable, high-quality growth opportunities while pulling back on incentive-driven campaigns that had weak ROI (return on investment) and less engaged users. They are emphasizing engagement initiatives over incentive campaigns. Quality over growth. It's a smart move for the future of the business, but it will require a reset of investor expectations first. On the bright side, management said they plan to provide more disclosures around its net new actives, including monthly active unique user metrics and ARPU (average revenue per user) metrics. This all could be a great thing if it points to the right story. Other misses include TPV Growth of 19% to 22% on a spot basis and 21% to 23% on an FX neutral basis while analysts were looking for a number closer to 22%. Also, PayPal expects to generate $6 billion in free cash flow this year, below the $6.7 billion estimate analysts had forecasted. PayPal's softest quarter this year is expected to be the first, consistent with prior commentary, due to tough comps and the eBay overhang. The company expects net revenue of $6.4 billion, representing an increase of 6% at the spot or 14% ex-eBay, with adjusted earnings per share of $0.87. Thoughts on stock move With the stock plunging after-hours of roughly 18% to roughly $145 per share, the question we must figure out now is how much of this move is an overreaction and what is justified. At under $150, which you have to go all the way back to May 2020 for the last time the stock traded this low, PYPL trades at roughly 31x the midpoint of management's 2022 earnings outlook. It's difficult for us to look out at any further than that because we have completely lost faith in management's ability to deliver on the 2025 targets they laid out approximately one year ago at their Investor Day. A 31x multiple in a rising interest rate environment isn't exactly cheap and it doesn't scream growth at a reasonable price to us with adjusted EPS expected to increase by roughly 2% this year based on the mid-point of management's guidance. But on the other hand, this eBay transition (which proved to be much nastier than what anyone expected) will be over and done with by the second half of the year, and the company's growth rates excluding eBay have encouraging remained above 20%. Plus the Amazon partnership with Venmo hasn't even started yet, and PayPal is free to explore many new partnerships now that it is no longer constrained by its relationship with eBay. Also, operating expenditure growth is also expected to moderate down the road, allowing management to flex the leverage in the business model and help expand margins. The outlook was ugly but we do see some silver linings that will require more evaluation in the days to come. (Jim Cramer's Charitable Trust is long PYPL and AMZN. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Dan Schulman

Mark Neuling | CNBC

PayPal (PYPL) reported disappointing fourth-quarter results after the closing bell Tuesday, and the stock got pummeled, sinking roughly 18% in after-hours trading.

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