PayPal: Fair Value $60

Summary

• PayPal's organic NNA growth dropped 30% below the 2019 baseline recently.
• With recession risks growing, PayPal may pull its 2022 net revenue and NNA guidance.
• I see a fair value substantially below current prices.

As the likelihood of a recession grows, it is more likely that $PayPal(PYPL)$ will lower its net revenue and account growth guidance for 2022. With PayPal's stock already dangerously close to 52-week lows, I believe withdrawing PayPal's 2022 guidance exposes investors to significant risks going forward. PayPal has a risk-adjusted fair value of $60, and I don't believe the stock will rise in the near future.

Net New Active Accounts Growing Much Slower Than Before The Pandemic

PayPal forecasted15-17% net revenue growthin 2022 based on spot rates when it released earnings for the previous quarter. The online payments company also reduced its forecast: PayPal expected 18% YoY growth in net revenues prior to the official release of the company's 2022 expectations. I believe that PayPal's risks have increased significantly in the last two months as a result of rising inflation rates.

PayPal had 426 million merchants and customers by the end of 2021. However, the online payments company's account generation has slowed dramatically. The upward trend in PayPal's net new active accounts is especially concerning.

Net new active accounts count the number of PayPal accounts opened by new customers during a given quarter after deducting accounts that have been closed. During the pandemic, the number of net new active accounts added peaked at 21.3 million in 2Q-20, but NNA growth has since slowed in three of the last four quarters. Growth in NNA is clearly slowing, with 9.8 million new accounts added in 4Q-21, the lowest level since the pandemic began.

Net New Active Accounts (PayPal)

What readers must understand is that the 9.8 million in net new active accounts is not an organic figure: It includes 3.2 million accounts that were transferred to PayPal following the Paidy acquisition last year.

PayPal acquired Paidy, a Japanese BNPL startup, for 300 billion yen ($2.7 billion) in 2021 to add new services. PayPal's net new active account additionswere only 6.6 millionon an organic basis. Let's look at PayPal's NNA chart before the pandemic to see how steep the decline in organic net new active account growth is:

Net New Active Accounts From Acquisitions (PayPal)

PayPal added an average of 9.35 million new active accounts organically in each quarter of 2019, implying that the 6.6 million organic accounts added in 4Q-21 were 30% lower than the Pre-Covid-19 baseline.

Adding 6.6 million new accounts is no easy task, so I'm not slamming PayPal. What I mean is that, on an organic level, PayPal's account growth is much weaker than the consolidated numbers indicate, and this could have implications for PayPal's 2022 guidance as recession risks increase.

PayPal expects to add 15 to 20 million net new active accountsin 2022, compared to 48.9 million net new active accounts in 2021. Net new active accounts increased 45.7 million on an acquisition-adjusted basis. This number is expected to fall by 59% YoY in 2022 (assuming the top guidance point of 20 million new accounts), indicating slowing net revenue growth that could worsen, particularly if a recession affects consumer spending.

With inflation surging to 8.5% in March and new highs expected in April, recession risks (and consumer spending risks) have risen dramatically in recent months. If economic headwinds worsen in 2022 and a recession becomes more likely, PayPal will have to withdraw its 2022 guidance and lower its NNA guidance yet again.

Departure Of PayPal's CFO

After seven years as CFO and executive vice president in PayPal's Global Customer Operations group, John Rainey isleavingthe online payments company. John Rainey is leaving PayPal to take a new position at Walmart.

While CFOs frequently change positions to pursue new opportunities or promotions in other companies, CFO departures are rarely viewed positively by the company that loses key personnel. The departure of the CFO contributed to PayPal's stock approaching its previous 52-week low.

PayPal stock fell another 8.5% yesterday, indicating that investors are becoming increasingly concerned about the possibility of a recession.

PYPL Share Price

Fair Value $60

Right now, I would avoid touching PayPal until we see a firm bottom formation indicating the end of PayPal's depressing correction, which has now lasted more than a year.

PayPal anticipates non-GAAP earnings per share of $4.60-$4.75 this year, assuming no recession. On average, the market forecasts $4.63 in earnings per share for 2022. Despite a 50% drop in value this year, PayPal's stock still has a P/E ratio of 20x.

Earnings Estimate

In the event of a recession, analysts will like to apply broad-based cuts to PayPal's EPS estimates, which I will also do. A fair value estimate of $60 is obtained by applying a 13x multiple to PayPal's 2022 earnings forecast, which is more justified than a 20x multiple given PayPal's slowing organic NNA growth and higher recession risks. Given that PayPal is currently trading at $94.90, the stock could fall another 37%.

What Could Drive PayPal Stock Higher (Or Why I Could Be Wrong)

Recession risks have increased significantly this year, but that doesn't mean a recession will derail PayPal's business or occur at all. Although net revenue and account growth may slow in the short term, PayPal has the scale and size to deal with a recession. PayPal could also surprise the market and re-accelerate its NNA growth, for example, through new acquisitions.

Conclusion

It is not impossible that PayPal's 2Q earnings report will include another net revenue guidance and NNA bombshell. With inflation on the rise and recession risks on the rise, PayPal may have to revise its net revenue and NNA forecasts for 2022. Because organic NNA growth has also slowed significantly, I believe PayPal's risk-adjusted fair value is no higher than $60.

source: seekingalpha