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Don’t Read Too Much Into PayPal’s Post-Earnings Bounce

  • Hard-hit PayPal (PYPL) stock surged after the release of its latest quarterly results.
  • Yet while some bad news is priced-in, there may be more bad news ahead.
  • The takeaway? Don’t view its post-earnings bounce as a sign to buy.
PayPal logo and front of headquarters

Source: Michael Vi / Shutterstock.com

Going into PayPal’s (NASDAQ:PYPL) earnings, investors were not too optimistic. Right before it reported earnings on April 27, PYPL stock in fact hit a new 52-week low. But once its results and guidance updates hit the street, the market’s sentiment took an 180 degree turn.

The following trading day, shares in the fintech firm jumped by double-digits. With this, you may be thinking the worst may be over for this stock. After hitting a new 52-week low, you may think it’s all uphill from here.

However, I wouldn’t assume that’s going to be the case. While recent bad news may already be priced-in, more bad news may lie ahead. Alongside this, market conditions remain highly unfavorable for growth plays like this one. Add it all together, and there’s a good chance shares are destined to hit new 52-week lows in the months ahead.

Ticker Company Current Price
PYPL PayPal $90.55

PYPL Stock and Recent Earnings

Despite the positive results, PayPal’s results for its fiscal first quarter (ending March 31) were actually a mixed bag. On one hand, it did report better-than-expected revenue growth. Specifically, 7% year-over-year revenue doesn’t sound exactly impressive, but it was ahead of the 6% revenue growth management guided for in its previous earnings release.

On the other hand, earnings fell short of guidance. GAAP earnings-per-share (EPS) of 43 cents came in below last quarter’s earnings guidance (50 cents). More importantly, in its newest guidance to investors, management again walked back its revenue growth estimates for 2022, from 17% down to 13%.

So, with a little bit of good news, and a fair amount of bad news, why did investors bid up PYPL stock? There may have been a bit of “sell the rumor, buy the news” going on. That is, selling the stock ahead of disappointment, only to get back in as the actual results weren’t as bad as feared.

Related to this, the market may be starting to have the perception that “the worst is over,” and things can only get better from here. Again though, I don’t believe this perception matches up with reality.

Why the Situation Could Worsen for PayPal

Following earnings, one sell-side analyst has come out and declared that the bad news is already priced-into PYPL stock. That was the rationale of CFRA analyst David Holt, in his upgrade of shares from “hold” to “buy,” although with a price target cut from $149 to $115 per share. In Holt’s view, following its extended price decline, “negative sentiment could be bottoming.”

Yet while negative sentiment may have already peaked, that’s not to say there isn’t more disappointment ahead for PayPal. For instance, PayPal’s efforts to find growth through expansion into the cryptocurrency space could be stymied by the U.S. Government’s “crypto crackdown.”

Even among the fintech giant’s long standing lines of business, it may face challenges over the next few months. A possible economic slowdown, due to the Federal Reserve’s raising of interest rates to combat inflation, could further impact the performance of its payments processing unit.

And it’s not just an economic slowdown that might cause pain, but rising competition from rival services like Zelle could further affect the performance of its once fast-growing Venmo segment. Venmo’s growth has already slowed down considerably since 2021.

Bottom Line on PYPL Stock

It’s not certain that PayPal’s operating performance continues to underwhelm. Management has dialed back expectations by a wide margin. This may make it easier for the company to exceed them in the quarters ahead. Still, while this may minimize further drops from here, it may not be enough to spark a recovery for the stock.

As it transitions into a more mature, slower growing business, it’s going to be difficult for shares to get back the rich valuation they once fetched. Instead of getting back to a 30x, 40x or even 80x earnings, going forward the stock may now have to settle for a more modest multiple.

In short, the best case scenario is that it avoids further losses. The worst case scenario, which is looking increasingly likely, is that worsening economic conditions could lead to results continuing to come in below guidance/expectations. This may keep PayPal stock on its current downward trajectory.

Don’t view the market’s positive reaction to earnings as a sign the story has changed with PYPL stock. Taking a closer look, it’s clear that’s not the case.

PayPal earns an “F” rating in my Portfolio Grader.

On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.

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Article printed from InvestorPlace Media, https://investorplace.com/2022/05/pypl-stock-dont-read-too-much-into-paypals-post-earnings-bounce/.

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