PayPal Hits the Reset Button

The good news for the stock is that expectations were already substantially reduced after the company flagged a strategic pivot earlier this year. The reset of guidance may actually be an entry point for some investors back into the stock.

Alongside many fintechs, PayPal shares had plunged 56% so far in 2022 through Wednesday’s close. At the new, lower guidance for 2022 adjusted earnings per share, and after a more than 3% gain in the stock on Thursday morning, PayPal is now trading around 22 times forward earnings. That multiple is still historically quite low. Even before the pandemic, from 2017 to 2019, the company typically traded well north of 30 times analysts’ forward estimates, according to FactSet data.

One thing that might help the company earn back a higher multiple is that growth may soon resemble its prepandemic pace, especially as the company gets further away from the end of its prior eBay relationship. The midpoint of the updated guidance already implies more than 15% growth in the second half of 2022. That could approximate or exceed the revenue growth rate in 2019. Given that the company says it is building in a worsening macroeconomic environment into the forecast, any positive surprises to the backdrop could now set the stock up for gains.

There are of course some big differences to 2019, too. One is that there might now be slower growth ahead in the overall global e-commerce market than there was back then, since so much expansion happened during the pandemic. Though with a focus on fast-growing merchants, PayPal can still exceed market growth. For example, its Braintree online payment-processing business grew volume 61% year-over-year in the first quarter.

In addition to payments growth, the pandemic may have likewise pulled forward growth in the number of PayPal accounts. After adding over 120 million net new active accounts over 2020 and 2021, PayPal now anticipates adding about 10 million in 2022—half of the top end of its prior guidance for the year, and about a quarter of what it added back in 2019. Partly this is by design, as PayPal lets users who rarely transact churn off, arguing that spending to keep them isn’t a high-return investment.

That sets the stage for PayPal to focus more intensely on increasing revenue from customers and merchants it already actively engages. Though there are many players fiercely competing in different components of digital payments and commerce, PayPal has a broad and global platform: It can offer payment processing, digital wallets, buy-now-pay-later, discounts and rewards, remittances, online savings accounts, bill payments, peer-to-peer payments, cash-back credit cards, cryptocurrencies, and far more. It is also still throwing off billions in cash to fuel further acquisitions or investment.

So, whatever drives the next leg of growth in digital finance for a consumer or business, PayPal will very likely be there. But PayPal shares may not fly so high again until those next catalysts come into sharper focus.

Write to Telis Demos at telis.demos@wsj.com