Sending money to pay for things through Venmo can be the rage among smartphone-addicted millennials and Gen Zers. But it has not been enough to increase Venmo owner PayPal lately. The digital payment giant is one of the worst stocks in the S&P 500 this year. Shares have fallen more than 55% so far in 2022.
PayPal (PYPL) warned back in February that sales and the new active user growth would be below forecasts. CFO John Rainey said the combination of inflationary pressures, supply chain problems and the lack of new stimulus from the federal government hurt consumer sentiment and spending.
PayPal reported first quarter results after closing on Wednesday. Sales increased by 8% from a year ago, slightly above forecasts. Earnings from year to year fell sharply and guidance was below estimates. The stock was up a bit after hours.
What hurts worse for PayPal is the fact that Rainey plans to leave the company soon after seven years there. The technology company surprised Wall Street earlier this month when it announced that Rainey will be the new CFO of Walmart (WMT) and will leave 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 a difficult kind of purgatory with John Rainey on the way,” said Andrew Bauch, senior analyst at SMBC Nikko Securities America.
Investors are also nervous that the company may need to lower its outlook again.
“This seems like a situation where the current management may need to reset the guidance further to lower the list for when a new CFO comes in,” said Jordan Kahn, chief investment officer at ACM Funds.
Kahn said his firm sold PayPal shares in January before the latest earnings report due to concerns about growth. But he still likes the long-term outlook for the stock and said he is waiting for the right moment to potentially come in again.
Another concern? Consumers are starting to return to brick-and-mortar retailers to shop as fears of Covid diminish thanks to vaccinations and less deadly – albeit more contagious – variants of the virus.
This means that consumers can 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 also increasing, and that does not help. PayPal and Venmo are in a fierce battle for users with the likes of Block (SQ), the parent company of Square and the Cash App, as well as Zelle, fintech owned by a consortium of seven of the country’s top banks, including Bank of America (BAC) and JPMorgan Chase ( JPM).
However, PayPal may benefit if Block boss Jack Dorsey appears to be more involved in Twitter in the wake of Elon Musk’s acquisition. Dorsey used to be the 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 on Twitter, it could help PayPal and open the door for them to gain ground,” Vecchio said.
Kahn agreed that Dorsey’s more focus on Twitter would be “great for PayPal,” but he thinks that’s unlikely to happen. Which means PayPal has to work harder to revitalize user growth.
The weak outlook may force the company to look at more acquisitions to rejuvenate sales and earnings. Late last year, there was speculation that PayPal was looking to buy the social media company Pinterest (PINS), but PayPal has said that no agreement is underway.
Some analysts have also suggested that PayPal may make a bet for the struggling online brokerage house Robinhood, which just announced layoffs on Tuesday. Bauch said he would not be surprised to see PayPal try to engage in “some creative M&A” to boost growth.
The question is whether PayPal investors, who have permanently put the stock in Wall Street’s penalty box, would approve.
But Kahn said the good news is that after this year’s market crash, most fintech companies are in the same boat as PayPal. This means that they are all much cheaper – and potentially ripe for a takeover.