PayPal stock just crashed! Should I buy?

Down 55% this year, PayPal stock has suffered further misfortunes. But with a healthy outlook, should I buy its stock after its latest crash?

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PayPal (NASDAQ:PYPL) stock has crashed 15% over the last three days. With the stock already heavily down this year, the most recent drop has stoked further disappointment. Nonetheless, could this be an opportunity for me to buy more of its stock?

PayPal policy

Things got sticky when PayPal expanded its list of prohibited activities on Saturday. Under the new terms and conditions, those who are deemed to have violated its policy of ‘spreading misinformation’ would be subject to a fine of $2,500, debited from their PayPal account.

This irked investors, given the company’s track record of shutting down accounts of users who didn’t align politically with the company. Many users, including Lightspark CEO David Marcus and Tesla CEO Elon Musk, have criticised the company’s policy.

Since then, PayPal has issued a statement to amend its policy, and said that it was released “in error“. Be that as it may, the damage may have been done, as thousands of users claim to have closed their accounts in light of the policy.

Impact on earnings

Politics aside, how may this impact PayPal’s top line? Well, a mass exodus of accounts may see a further decline in PayPal accounts, which have already seen a drop in growth. Consequently, this could have an impact on the firm’s payment volumes and its growth outlook.

MetricsQ2 2022Q2 2021Change
Total payment volume (TPV)$339.8bn$311.0bn9%
Total payment transactions (TPT)5.51bn4.74bn16%
Total active accounts (TAA)429m403m6%
Net new accounts (NNA)0.4m11.4m-96%
Source: PayPal Q2 2022 earnings report

For the full year, the Nasdaq-listed firm expects revenue growth of 10%, with a non-GAAP earnings per share of around $3.92. Along with this, the board forecasts to grow total payment value by 12%, add 10m more accounts, and have a free cash flow of at least $5bn. Nevertheless, if users continue to close accounts, these metrics may be difficult to achieve. The headwinds associated with the current macroeconomic environment would not help either.

Therefore, PayPal would have to heavily rely on its cost savings to meet estimates. CFO Gabrielle Rabinovitch expects an approximate $900m worth of cost savings for the year, and a further $1.3bn next year.

Discounted stock?

So, should I buy PayPal stock while it’s on a discount? Well, I’m a current holder and I am optimistic about its financial outlook and plans to expand its digital wallet features to more regions. After all, PayPal stock has an average ‘strong buy’ rating with an average price target of $120.82.

The company’s financials are in a decently healthy position too. Despite having $10.6bn worth of debt, PayPal has quite a long runway to meet its repayments. I’m comfortable it will be able to do this given its current cash pile of $9.31bn.

YearDebt Repayments
2022$0
2023$0.42bn
2024$1.25bn
2025$1.0bn
2026$1.25bn
Thereafter$6.50bn
Source: PayPal Q2 2022 Form 10-Q

That being said, I do have my concerns. If PayPal’s controversial activities continue, it may start facing more backlash and suffer heavier consequences in the form of losing users and/or anti-trust lawsuits. This would inevitably impact the company’s business case and tarnish shareholders’ sentiment.

In the meantime, I think management needs to place more focus on growing the company. However, because the impact of cancelled accounts are still speculative and anecdotal, I’ll just hold onto my positions for the time being.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

John Choong has positions in PayPal Holdings. The Motley Fool UK has recommended PayPal Holdings and Tesla. Wells Fargo is an advertising partner of The Ascent, a Motley Fool company. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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