Paypal Stock Has Problems

Summary

In this video update, the presenter shares their evolving perspective on PayPal stock. After a strong 2024, where the stock surged by 48%, the presenter reflects on their past bullish stance, having heavily invested in PayPal when the stock was trading around $50-$60. Despite earlier optimism, concerns now arise due to slowing revenue growth, with Q3 and Q4 guidance showing minimal increases. The presenter remains cautious, considering reducing their PayPal position in the portfolio. While there's still potential for recovery, the outlook has dimmed, prompting a more risk-averse approach going forward.

Takeaways

• 😀 PayPal has had a strong performance in 2024, up 48%, significantly outperforming the S&P 500.
• 😀 The speaker had been heavily buying PayPal stock in 2023, and it became their top stock for 2024.
• 😀 Recently, more investors are buying into PayPal, driving up the stock price, but the speaker is starting to sell and become cautious.
• 😀 Despite PayPal's success, concerns are rising about its future performance due to slowing revenue growth.
• 😀 PayPal's earnings multiple has increased to 21 times earnings, but the speaker believes the stock needs a higher multiple (25-30) for further upside.
• 😀 Revenue growth guidance for Q3 was 5%, and Q4 guidance is even lower, with expectations of low single-digit growth.
• 😀 Analysts are expecting PayPal to grow at 3% in Q4, which is significantly lower than previous expectations.
• 😀 The speaker originally expected PayPal to grow between 4% and 12% per year, but growth is now projected to be much lower than anticipated.
• 😀 Profitability is increasing faster than revenue, which could help the company in the short term, but sustained growth is necessary for long-term success.
• 😀 The speaker is rebalancing their portfolio, reducing PayPal from their third-largest position to around the sixth or seventh-largest position due to these concerns.
• 😀 Although the speaker is concerned about PayPal's future growth, they are not selling all their shares and will reassess after Q1 earnings in March.

Q & A

Why is the speaker concerned about PayPal's future despite its strong performance in 2024?

The speaker is concerned because although PayPal's stock price has increased by 48%, its revenue growth has slowed significantly. Additionally, PayPal's current earnings multiple has risen to 21x, which limits its potential for further growth unless the company can achieve higher earnings multiples, which the speaker is skeptical about given the company's low growth projections.

What were the speaker's initial expectations for PayPal's growth when they first bought the stock?

The speaker initially expected PayPal to achieve revenue growth between 4% and 12% per year. They believed the stock could grow significantly in value, with potential for PayPal to expand its earnings multiple to 25-30x, offering a greater upside.

How does the speaker feel about PayPal's earnings multiple now?

The speaker is concerned that PayPal's current earnings multiple of 21x is too high for the company, especially given its slower-than-expected growth. They had hoped for a higher earnings multiple but now feel the stock is struggling to justify that level of valuation with current growth prospects.

What has been PayPal's revenue growth for Q3 and the guidance for Q4, and why is this a concern?

For Q3, PayPal's revenue growth was 5%, which was at the low end of the speaker's expectations. The guidance for Q4 is for low single-digit revenue growth (around 2-3%), which is significantly below the speaker's forecast and represents a slowdown in growth that is concerning for the stock's future performance.

Why does the speaker believe PayPal's low revenue growth may affect its stock price?

The speaker believes that low revenue growth (especially below 5%) makes it difficult for PayPal to justify a high earnings multiple (such as 25-30x). Without stronger revenue growth, PayPal is unlikely to experience significant metric expansion, and the stock's upside potential is limited.

What does the speaker mean by 'metric expansion,' and why is it important for PayPal's stock?

Metric expansion refers to an increase in PayPal's earnings multiple, where the stock price would rise faster than its earnings growth. For the speaker, achieving metric expansion (e.g., a rise from 21x to 25-30x earnings) would be a key driver for stock price growth, but this depends on the company maintaining strong revenue and profitability growth, which the speaker now questions.

How does the speaker assess PayPal's profitability compared to its revenue growth?

The speaker notes that PayPal's profitability is improving faster than its revenue growth, which may help in the short term. However, the speaker cautions that there is only so much a company can achieve by improving efficiency and that eventually, revenue growth will need to accelerate to sustain long-term profit growth.

What is the speaker's outlook for PayPal's growth in 2025?

For 2025, the speaker anticipates revenue growth of about 5%, which is still below their original expectations. While this growth is not terrible, it is at the low end of their forecast and doesn't provide enough upside to justify PayPal maintaining a high earnings multiple, especially considering other stocks in their portfolio offer better growth potential.

How is the speaker adjusting their portfolio in light of these concerns about PayPal?

The speaker is reducing their position in PayPal, moving it from their third-largest holding to a lower position in the portfolio (likely the sixth or seventh-largest). While they are not selling entirely, they are taking profits off the table and rebalancing due to concerns about PayPal’s future growth and risk-to-reward ratio.

What role does new leadership (Alex Chriss) play in the speaker’s outlook on PayPal?

The speaker expresses hope that new leadership under **Alex Chriss** could bring changes that will help PayPal return to stronger growth. They suggest that new products or strategies under Chriss could drive higher revenue growth, better profit margins, and potentially improve PayPal’s stock performance, but this remains uncertain.