- 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.
- Elliott Management, a group of active hedge fund investors, has announced that it has invested $2 billion in PayPal.
PayPal Holdings Inc. is operated. ($PYPL) A very popular digital payment platform for merchants and consumers looking to make digital or mobile payments globally. If you’ve ever been online, you’ve likely used PayPal or encountered a payment processing system at some point.
PayPal is a pioneer in the field of digital payments, and the company has had to stand up to many competitors over the years to get to where it is today.
PayPal separated from eBay in July 2015, and PayPal stock has generously returned to its shareholders over the years. Although PayPal reported a net loss in the second quarter of 2022, many analysts consider this stock a buy. Let’s take a closer look at the PayPal stock.
What does PayPal do?
PayPal is a popular digital payment services platform that handles transactions worldwide. The company is famous for raising funds and handling various financial transactions. The company allows you to raise funds for the exchange of goods and provide payment services to merchants. Most of us have heard of PayPal through eBay because it has been the auction site’s primary payment processing method for years. If you’ve ever completed an online transaction, there’s a good chance you’ll use PayPal.
You may also have noticed that they charge you a transaction fee. These fees are not a big deal until you start running an online business. The company generates revenue through transaction fees charged for processing payments globally. Although it is slowly becoming easier to send money around the world, many countries and companies still rely solely on PayPal due to its accessibility and security.
With 429 million active users worldwide, it’s safe to say PayPal isn’t going anywhere anytime soon as the company’s ventures into cryptocurrency payments and apps like Venmo are becoming more and more popular for simple financial transactions.
How PayPal Makes Money
The company doesn’t fully detail every aspect of how they make money. They have transaction proceeds and proceeds from other value-added services.
These are transaction fees charged to merchants and consumers for each transaction. It's the fee you see when you buy or receive money online. The fee is a percentage, so larger purchases will come with higher fees.
PayPal also brings in money through currency conversion when dealing with cross-border transactions. Since many users exchange money all over the world, PayPal can generate a lot of revenue through currency conversion.
PayPal charges additional fees for instant transfers of funds from a PayPal or Venmo account to a debit card or bank account as well as fees for facilitating the purchase and sale of cryptocurrency. The company has started acquiring more cryptocurrencies over the past few years.
Revenue from other value-added services
This revenue comes from partnerships, referral fees, subscription fees, portal fees, and other services provided to merchants and consumers. Further, the company brings in revenue from interest and fees earned on loan receivable portfolio along with interest earned on certain assets from customer balances.
Profit trends and balance sheet
PayPal announced its second-quarter earnings results on August 2, 2022. The quarter's results were stronger than what conservative Wall Street experts had originally expected. PayPal reported revenue of $6.81 billion in the first quarter. This was a 9% increase from the second quarter of last year. PayPal reported a net loss for the quarter of $341 million. This was the first unprofitable quarter that PayPal announced since the early months of 2014.
It's worth noting that PayPal's stock is down 54% year-to-date at the same time it announced its second-quarter results. The company achieved strong financial results during the pandemic as there was a boom in online shopping and many people increased their overall internet consumption. However, the company has struggled to adapt to life after the pandemic, according to several experts.
In response to the first net loss in years, the company expects to cut expenses by $900 million in 2022 and $1.3 billion in 2023 with moves to cut costs. These moves are expected to make the company profitable because it makes better use of capital to increase shareholder value.
Cash, cash equivalents, and investments totaled $15.6 billion as of June 30, 2022. Total assets were $77.81 billion (an increase of 2.64% sequentially). Total liabilities were $54.08 billion (down 5.15% sequentially).
Thanks to Venmo's growth, PayPal added nearly 400,000 new active accounts in the second quarter that ended June 30. The company had 429 million active accounts at the end of June, 90 million of which were Venmo accounts.
PayPal reported revenue of $25.4 billion in 2021, with annual net income of $4.168 billion, down 0.79% from 2020.
The company also repurchased about 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 for PayPal shares to buy. Raymond James analyst John Davis sees PayPal stock could rise as much as 30%. But it's hard to predict how much PayPal's stock will increase because the stock market as a whole has been volatile lately due to recent inflation reports and fears of a recession.
We will wait to see how the cost-cutting initiatives will be implemented over the next year. If the company can make the financial cuts it thinks it can, the company will become more profitable.
The growth of Venmo is something to track because the company was able to add 400,000 new net activity accounts primarily because of this app. With tens of millions of users, it should bring in more revenue as the world returns to normal. Life after the pandemic means that more people will be spending money and splitting expenses with friends.
PayPal also confirmed that hedge fund Elliott Management has invested $2 billion and that they have entered into an information-sharing agreement to increase value. Some analysts support the move because they believe that having a strong active investor as a shareholder may force the company to focus on improving margins. With PayPal stock posting adjusted earnings as low as 93 cents a share in the second quarter, investors are hoping it will help the active investor make tough decisions to make the company more profitable going forward.
We should also pay attention to Paypal's battle with Block ($SQ) as they both compete for the cryptocurrency space. Many digital payment services are working on ways to accept cryptocurrency as it becomes more and more popular.
Furthermore, PayPal also announced that Blake Jorgensen, of 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 the stock has clearly been volatile recently as the company struggled with post-pandemic trading operations and general market conditions.
Building a flexible investment portfolio
Although many analysts are considering buying PayPal stock at the moment, that doesn't mean that this is the best move for your portfolio. We all have unique goals with different time horizons.
If you are interested in how to invest your money in times of high inflation and general market uncertainty, you may want to take a look at Q.ai's Inflation Kit to protect your investment. Even better, you can activate portfolio protection at any time to protect your gains and reduce your losses, no matter what industries you invest in.
PayPal is a giant in the digital payment processing industry. We've almost reached the point where everyone is expected to use PayPal. With Venmo increasing in popularity, it will be interesting to watch how the company's transaction revenue increases. 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 many analysts have, as of late, considered buying this stock.
Download Q.ai today To access investment strategies backed by artificial intelligence. When you deposit $100, we will add an additional $100 to your account.