PayPal Stock Is Down 54% This Year. Here Are 3 Reasons Not to Buy.
PayPal (NASDAQ:PYPL), a leading digital payments processor, has been making its shareholders unhappy in 2022 as PYPL stock has declined year-to-date by 54%.
If you’re a contrarian investor, you might now be thinking that PYPL stock could be a buy now. Here are three reasons why that’s not a good idea.
PYPL Stock and the Supply Chain
We have been experiencing a return to normality after the past two years of lockdowns and Covid-19 restrictions. Covid-19 isn’t over, but vaccines have made people more likely to go out, socialize and shop in physical stores. This trend will likely persist.
However, the supply chain disruptions will not disappear easily shortly. China has imposed further lockdowns for quite some time, leading to shortages of a plethora of goods as factories have been closed.
Both of these trends are likely to persist, which is not encouraging for PayPal.
For Paypal, growth is vital to draw the attention of investors and send its shares higher. In Q1 2022 there has been a severe growth slowdown. Its platform spending growth was only 15%, a five year low.
Cutting Jobs to Save Money
PayPal has announced job cuts not only at its headquarters in California, but also in Arizona, Nebraska and Illinois.
The company has stated it took $20 million in restructuring costs in the first three months of 2022 and expects $100 million more in restructuring charges this year. These moves are expected to “save about $260 million a year in employee-related costs.”
PYPL Stock Has Poor Financial Performance
Paypal’s first quarter results showed a major problem in profitability. Year-over-year operating margin declined to 11% versus 17.3%, net income declined 54% to $509 million versus $1.1 billion and earnings per diluted share fell 53% to 43 cents versus 92 cents. Q1 2022 has been the third consecutive quarter that PayPal reported lower net income.
In February, PayPal reported weak revenue guidance for 2022, anticipating “revenue to grow about 15% to 17% for the full year 2022, on a spot and foreign-currency-neutral basis.” That’s lower than the 17.9% analysts forecast.
In its Q1 earnings, the firm reported “net revenues expected to grow ~11%-13% on a spot and FXN basis,” so I expect a further downward revision.
PayPal’s valuation metrics aren’t great either. Most of the key financial ratios show a premium compared to the rest of the sector. Therefore, I do not consider PYPL stock to be attractive even after its decline.
On the date of publication, Stavros Georgiadis, CFA did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
