Sending money to pay for things via Venmo may be all the rage among smartphone-addicted millennials and Gen Zers. But it hasn’t been enough to boost Venmo owner PayPal as of late. The digital payments giant is one of the worst performing stocks in the S&P 500 this year. Shares have plunged more than 55% so far in 2022.
PayPal (PYPL) warned back in February that its sales and new active user growth would be below forecasts. Chief financial officer John Rainey said the combination of inflationary pressures, supply chain issues and the lack of any new stimulus from the federal government was hurting consumer sentiment and spending.
PayPal reported its first quarter results after the closing bell Wednesday. Sales grew 8% from a year ago, slightly ahead of forecasts. Year-over-year earnings dropped sharply and guidance was below estimates. The stock was up a bit after hours.
Making matters worse for PayPal is the fact that Rainey is planning to soon leave the company after seven years there. The tech firm surprised Wall Street earlier this month when it announced that Rainey is going to become the new CFO at Walmart (WMT) and will be leaving PayPal at the end of May.
The company is looking for a permanent replacement. But until one is found, Gabrielle Rabinovitch, PayPal’s senior vice president, corporate finance and investor relations, will be interim CFO.
“PayPal is in an awkward kind of purgatory with John Rainey leaving,” said Andrew Bauch, senior analyst with SMBC Nikko Securities America.
Investors are also nervous that the company may need to lower its outlook again.
“This seems like a situation where current management may need to reset the guidance further in order to set the bar lower for when a new CFO comes in,” said Jordan Kahn, chief investment officer of ACM Funds.
Kahn said his firm sold PayPal shares in January before the last earnings report due to concerns about growth. But he still likes the long-term prospects for the stock and said he’s waiting for the right moment to potentially get back in.
Another concern? Consumers are starting to go back to brick and mortar retailers to shop as fears about Covid subsidize thanks to vaccinations and less lethal — albeit more transmissible — variants of the virus.
That means that consumers may look to make more purchases with credit and debit cards or cash in physical stores and make fewer digital payments for online shopping, said Christopher Vecchio, senior strategist at DailyFX.
Competition is intensifying as well and it’s not helping. PayPal and Venmo are in a fierce battle for users with the likes of Block (SQ), the parent company of Square and Cash App, as well as Zelle, the fintech owned by a consortium of seven of the country’s top banks, including Bank of America (BAC) and JPMorgan Chase (JPM).
PayPal could benefit, though, if Block CEO Jack Dorsey looks to become more involved with Twitter in the wake of Elon Musk’s acquisition. Dorsey used to be CEO of both companies and some believe that a distracted Dorsey was good for PayPal.
“If Dorsey were to become a part-time CEO who was back at Twitter, that could help PayPal and open up the door for them to gain ground,” Vecchio said.
Kahn agreed that Dorsey focusing more on Twitter would be “great for PayPal” but he thinks that is unlikely to happen. Which means PayPal will have to work harder to revitalize user growth.
Its sluggish prospects could push the company to look towards more acquisitions to rejuvenate sales and earnings. Late last year, there was speculation that PayPal was looking to buy social media firm Pinterest (PINS), but PayPal has said no deal is in the works.
Some analysts also have suggested that PayPal could make a play for struggling online brokerage Robinhood, which just announced layoffs Tuesday. Bauch said he would not be surprised to see PayPal try to engage in “some creative M&A” in order to boost growth.
The question is whether PayPal investors, which have firmly put the stock in Wall Street’s penalty box, would approve.
But Kahn said the good news is that following this year’s market slide, most fintech companies are in the same boat as PayPal. That means they are all a lot cheaper — and potentially ripe for a takeover.