San Jose, California-based PayPal Holdings, Inc. (PYPL) is a leading digital payment company. The company operates a technology platform that allows digital payments on behalf of consumers and merchants worldwide. PYPL offers payment solutions under the names of PayPal, PayPal Credit, Venmo, Xoom, Hyperwallet, Zettle, Honey, Paidy, and Braintree.

The company operates in approximately 200 markets and 100 currencies to allow consumers to send and receive payments.

PYPL has plunged 52.5% in price year-to-date and 66.1% over the past year to close the last trading session at $92.70. It is currently trading 68.8% below its 52-week high of $296.70, which it hit on September 8, 2021.

The digital payments company lost its pandemic-era sheen. PYPL experienced solid growth during the pandemic due to a significant rise in contactless and digital payments. However, the company continues to witness its stock deflate owing to a post-pandemic slowdown, aggravated by losing its longtime partner, eBay Inc. (EBAY), to its European rival company, Adyen.

Moreover, the current macro environment dampened the company’s ability to grow as the multi-decade high inflation curbed consumer spending.

Investors have been bearish about PYPL due to its deteriorating financials and decelerating growth. In the fiscal 2022 second quarter ended June 30, 2022, the company’s revenue rose nearly 10% year-over-year, driven by the expansion of its peer-to-peer payments app Venmo. However, its non-GAAP net income and net income per share declined by 20.8% and 19.1% year-over-year, respectively.

Furthermore, the company’s key growth rates decelerated significantly over the past year. PYPL’s number of active accounts grew 6% year-over-year to 429 million in the second quarter versus 16% in the prior-year period. Its total payments volume (TPV) growth stood at 13% year-over-year, compared to 36% in the prior-year quarter. Also, its transactions growth decelerated from 27% to 16% year-over-year in the second quarter.

Here is what I think could influence PYPL’s performance in the upcoming months:

Poor Financials

For the fiscal 2022 second quarter, PYPL’s operating expenses increased 18.2% year-over-year to $6.04 billion. Its non-GAAP operating income decreased 21.3% year-over-year to $1.30 billion. Its non-GAAP net income declined 20.8% from the year-ago value to $1.08 billion. The company’s non-GAAP net income per share amounted to $0.93, down 19.1% year-over-year.

Weak Growth Prospects

Analysts expect revenues to increase 10.4% year-over-year to $6.82 billion in the fiscal 2022 fourth quarter (ending September 2022). However, the consensus EPS estimate for the ongoing quarter is expected to come in at $0.95, representing a 14% decline from the same period in 2021.

Furthermore, analysts expect PYPL’s EPS for the fiscal year 2022 (ending December 2022) to decline 14.7% from the prior-year period to $3.93.

Low Profitability

PYPL’s trailing-12-month gross profit margin of 43.47% is 13% lower than the industry average of 49.94%. Its trailing-12-month ROTC of 2.64% is 3.7% lower than the industry average of 2.74%. In addition, the stock’s trailing-12-month asset turnover ratio of 0.35% is 45.3% lower than the 0.64% industry average.

Frothy Valuation

In terms of forward non-GAAP P/E, PYPL’s 23.62x is 27.3% higher than the 18.55x industry average. Its 3.92x forward EV/Sales is 49.5% higher than the 2.79x industry average. Likewise, the stock’s 16.73x forward EV/EBITDA is 30.9% higher than the 12.78x industry average.

In addition, PYPL’s 3.85x Price/Sales is 39.2% higher than the industry average of 2.76x. Also, the stock’s 5.09x forward Price/Book is 23.5% higher than the 4.13x industry average.

POWR Ratings Reflect Bleak Prospects

PYPL has an overall rating of D, which translates to Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

PYPL is ranked #39 out of 48 stocks in the D-rated Consumer Financial Services industry.

Beyond what I have stated above, we have also given PYPL grades for Growth, Sentiment, Quality, Value, Stability, and Momentum. Get all PYPL ratings here.

Bottom Line

PYPL reported weak fiscal second-quarter results. Moreover, the company is expected to witness slowing growth in the near term as it continues to suffer from macroeconomic headwinds, such as high inflation, interest rate hikes, and shifts in consumer spending patterns.

Given PYPL’s disappointing financials, bleak growth prospects, higher-than-industry valuation, and low profitability, we think it could be wise to avoid the stock now.

How Does PayPal Holdings, Inc. (PYPL) Stack Up Against its Peers?

PYPL has an overall POWR Rating of D. One could also check out these other stocks within the Consumer Financial Services industry with a B (Buy) rating: Ezcorp Inc. CI A (EZPW), OneMain Holdings, Inc. (OMF), and Regional Management Corp. (RM).

PYPL shares fell $1.65 (-1.78%) in premarket trading Monday. Year-to-date, PYPL has declined -50.84%, versus a -14.03% rise in the benchmark S&P 500 index during the same period.

About the Author: Mangeet Kaur Bouns

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions. More...

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