Why PayPal plunged 34.9% in February

What happened

Shares of PayPal (PYPL -1.41% ) plunged 34.9% in February, according to data provided by S&P Global Market Intelligence.

The online payments company has seen its shares fall 42.6% year-to-date, in line with declines across a wide range of growth stocks.

Image source: Getty images.

So what

PayPal had announced a strong revenue package to close its fiscal year 2021 (FY2021) earlier this month. Total payment volume (TPV) on its platform jumped 33% year-over-year to $1.25 trillion, helping boost the company’s net revenue 18% year over year to $25.4 billion. Free cash flow increased from $5 billion in fiscal 2020 to $5.4 billion, while a total of 48.9 million new net asset accounts were added, bringing the total active accounts at 426 million.

Investors, however, were more focused on the pessimistic outlook PayPal gave for the first quarter of its fiscal 2022. Revenue is expected to rise just 6% year-over-year as eBay’s exit from the platform form of business was faster than expected. To recap, revenue grew 31% year-over-year in PayPal’s first quarter of fiscal 2021.

The other negative surprise was PayPal’s forecast for net new account additions. Chief Financial Officer John Rainey announced during the company’s last conference call that management had abandoned its mid-term target of 750 million accounts. The problem was that the company had been too successful in adding new accounts, but a portion of those accounts had low engagement and were not providing an adequate level of return for the company’s efforts. PayPal decided to moderate its new account additions to pursue more profitable growth, leading the company to forecast new account additions of 15 to 20 million for fiscal year 2022. This level of additions was significantly lower than nearly 49 million new accounts added in fiscal year 2021.

Now what

Investors cannot be blamed for being disappointed by this change. However, this muted forecast should be seen in a positive light. On the one hand, management has shown its candor in admitting that it has grown too quickly without focusing on the right financial metrics, and the level of honesty displayed is commendable. The company is also sacrificing some of its near-term growth to ensure a more sustainable long-term growth trajectory, an admirable trait given Wall Street’s relentless focus on quarterly projections.

It’s important to remember that PayPal remains the most accepted digital wallet in North America and Europe, with more than three-quarters of the top 1,500 online retailers using its platform. The company’s new digital wallet has also been embraced by cryptocurrency buyers and users. Investors need to realize that they will have to endure short-term difficulties before they see better numbers at PayPal by the second half of this year.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

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