Established in 2000, PayPal provided a payments hub for the online auction site eBay, which bought the company outright in 2002. In 2015, eBay spun off PayPal as an independent operation that has since become the world’s largest online money transfer business. PayPal remained an important component of eBay until 2021 when the auction site began paying sellers directly rather than through the PayPal platform.
About PayPal and Features
Along with its subsidiaries Venmo and Xoom, PayPal offers web and mobile platforms. Customers can pay for goods, send and exchange money, and borrow. Through PayPal Credit, the company allows customers to access lines of credit.
A crypto platform enables members to buy Bitcoin, Ethereum and other virtual currencies and use these virtual assets for purchases. For a fee, the platform converts crypto into equivalent currency at the time of sale. In January, PayPal announced the launch of its own stablecoin — a stablecoin being one pegged to an asset such as the U.S. dollar or other fiat currency. Stablecoins are used to facilitate crypto conversions.
The growth of “buy now, pay later” online retailing has provided PayPal with another revenue boost. In this type of transaction, a customer can delay payment on a purchased item over several months or a year. PayPal asks the seller for a small discount on the purchase price and pockets the difference when the buyer eventually completes the payment.
Early Pandemic Posed No Problem for PayPal — But That Could Be Changing
These in-demand money services have brought the company solid growth in revenues and net earnings over the past decade. PayPal stock had already been a hot item for institutional and individual investors for several years at the start of the pandemic year of 2020 when lockdowns and shortages drove many shoppers to online retail platforms.
In that year, COVID-19 restrictions on in-person shopping provided a major boost to traffic on PayPal and its subsidiaries. Earnings growth reached a heady 71% in the fiscal year 2020, more than tripling the 19% growth rate of 2019. The stock rose over 200% from March 2020, when pandemic shutdowns began, to August 2021, when the stock peaked.
Since then, PayPay has hit some headwinds, as demonstrated in its fourth-quarter 2021 earnings report, which was released on Feb. 4. The stock dropped 25% on mixed results and disappointing guidance for the first quarter of 2022, CNN Business reported. CEO Dan Schulman attributed PayPal’s “measured” revenue guidance on challenges posed by the transition away from eBay as well as the effects of inflation on consumer spending and the impact of supply-chain issues on cross-border payments from China and elsewhere.
PayPal has been leading the financial sector in digital innovations since 2020. The company revamped and updated its platform in the fall of 2021 with a host of new capabilities. Customers now have automatic bill pay and high-yield savings accounts available, as well as two-day early direct deposit access. Online shoppers have a range of new in-app tools at hand, including:
- Cash redeemable rewards
- Gift cards
- Charitable giving
- PayPal shopping credit
- Instant access to merchant discounts
The company introduced a paper check-cashing feature to Venmo members in the U.S. and launched touch-free QR payments for small businesses through its Europe-based Zettle. Xoom, PayPal’s money transfer subsidiary, has expanded services to 12 markets in Africa.
Good To Know
PayPal has been a reliable innovator, meeting the market’s expectations with a series of new features, services and capabilities. Always searching for new paradigms, investors have also been attracted by PayPal’s status as a leading “neo bank” that directly challenges institutions such as JPMorgan, Wells Fargo and Bank of America.
PayPal’s Trading Platform
PayPal is also developing a trading platform for stock market investors, a response to the phenomenal growth of trading platforms offered by Square, SoFi, E-Trade and Robinhood. Having been the first to the online auction business, PayPal doesn’t want to miss the trend of individual investors drawn to the markets by the “gamification” of trading on commission-free Robinhood and the gains shown by markets post-COVID-19.
Although building a new trading platform would face regulatory hurdles, PayPal has a big advantage in the form of an established base of 426 million customers — a figure it hopes to increase by 15 to 20 million in 2022, according to its earnings release.
With these new services, however, PayPal is running hard just to keep up. The fee-driven online money transfer business has attracted big banks as well as competition from established European companies seeking a foothold in the U.S.
In October 2021, U.K.-based SumUp, a point-of-sale card reader business, purchased Fivestars, a San Francisco-based digital marketing company. The new company will directly compete with Square, a similar U.S.-based business, but it also poses a market share threat to PayPal.
PayPal’s Security Risks
PayPal is also susceptible to the digital scourge of hacked accounts, stolen identities and mysteriously missing funds. The app enjoys a reputation for security, and PayPal has avoided major negative publicity over customer privacy issues. But hacked PayPal accounts are available on the dark web, for a fee, and one IT investigator has found that the value of these accounts nearly tripled during the pandemic.
“Cloud outages” and technical difficulties also pose a danger to wider acceptance of online money services. In case of any issues, PayPal customers must get in line with others for the dreaded customer service call. Amid these unpredictable IT problems and the constant drumbeat of hacking stories associated with credit cards, banks and retailers may put a lid on the future growth of PayPal and its competitors.
P/E and Earnings Trends
PayPal stock has been an institutional favorite for several years, and investors considering a move into the shares may want to consider the possibility that rapid future growth is already priced into the shares. The return to in-person shopping post-COVID-19 pandemic may also blunt the phenomenal growth rate the company enjoyed in 2020, leading to unimpressive year-over-year comparisons.
But it’s not just where people shop that gives investors cause for concern. It’s also how much they shop. PayPal expects inflation, combined with falling consumer confidence and the end of stimulus payments, to result in a sharp drop in consumer spending, especially among lower-income individuals, John Rainey, PayPal chief financial officer, said during an earnings call reported by CNN Business.
By October 2021, PayPal had reached a high valuation, at a price-to-earnings ratio of about 65. This represents a premium over the market average, but in the mid-range for the company over the past five years. Price-to-earnings has been slipping downward since hitting 100-plus in 2020 and currently sits at 32.42.
Earnings comparisons over the next few quarters may continue to reflect PayPal’s exit from the eBay platform in 2021. The separation of the two companies was amicable, and long-term investors such as hedge fund Wedgewood were not deterred.
“We continue to hold PayPal as a core position,” Wedgewood declared in its third quarterly newsletter, “and think eBay represents short-term noise in PayPal’s longer-term drive to become a ‘super all’ with payments at its core.”
Is PayPal Stock a Good Buy?
PayPal has grown into a formidable, reliable and innovative operation since its start with eBay. It also has global brand recognition and acceptance going for it.
Innovation doesn’t always translate into growth, however, and those pondering a new investment in the company may want to consider what the principle of “creative destruction” might mean for online platforms such as PayPal.
Cryptocurrencies, for example, remove financial transactions from the control of institutions, banks and money transfer companies and move them to individual savers, buyers and merchants. With the widespread use of digital wallets, will the masses still need an online, fee-based money transfer business?
Daria Uhlig contributed to the reporting for the article.
Information is accurate as of Feb. 14, 2022.
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