When PayPal (NASDAQ:PYPL) releases results for the fourth quarter on February 9, 2023, I think three key measures will interest investors. While PayPal did raise its earnings per share (EPS) projection for FY 2023 in the most recent quarter, investors should still expect underwhelming performance across the board, particularly concerning PayPal’s net new active account growth. Investors may find fresh enthusiasm in PayPal stock thanks to the company’s bright forecast for FY 2023 and its aggressive stock buybacks.
Fourth Quarter PayPal: Key Trends
The market has already seen a decline in several important measures during FY 2022, so investors expect little from the announcement of PayPal’s fourth-quarter results. Revenues of $7.4 billion are forecast for the fourth quarter, with adjusted earnings per share of $1.20. PayPal has predicted full-year adjusted profits per share of between $4.07 and $4.09. Pay Pal projected adjusted earnings per share of $3.87 to $3.97 before the third quarter. Even if PayPal does well relative to market forecasts, I don’t think we should anticipate too much of a positive upside surprise.
Here are this week’s three most important measurements:
In FY 2022, PayPal is projected to add up to 20M new accounts. However, this forecast has been lowered to 8-10M by the third quarter. I predict that net additions will likely be below the low end of this projection as a result of ongoing difficulties on the consumer front (inflation).
After a poor second quarter in which PayPal gained just 0.4M new user accounts, the payments business witnessed a bit of a bounce regarding active account growth in Q3’22, adding 2.9M new clients. With a total of 5.7 million new accounts created by PayPal between January and September 2022, the company needs to add another 2.3 million accounts in the fourth quarter to reach its low end of guidance and another 4.3 million to reach its high end of guidance of 10 million new customers in FY 2022.
I don’t think PayPal gained much traction in the fourth quarter in client acquisition since, as I said before, rising inflation and sluggish economic growth likely continued to compel customers to cut spending. My forecast for PayPal’s Q4 is 3.5 million net additions, bringing the total number of new accounts for the year to 9.2 million.
Free cash flow is the second crucial statistic I will be following since it has been a driving force behind PayPal’s high-value multiplication factor in the past and was likely a major reason for Elliott Management’s decision to acquire a stake in the payments business last year.
PayPal has protected its free cash flow because of its moat-like payments industry despite difficulties in account growth in FY2022. PayPal’s free cash flow resilience is a key reason for FinTech’s strong recession value. In the first nine months of this year, PayPal earned $4.1B in free cash flow, and the company has maintained a quarterly FCF of above $1.0B. The minimum free cash flow expected in Q4’22 based on PayPal’s projection for FY 2022 is $892M. As a result of this robust participation, I anticipate that PayPal’s free cash flow will fall within the range of $5.1 billion to $5.2 billion, just within the company’s expectations.
The substantial free cash flow that PayPal generates naturally allows for stock repurchases. PayPal stock repurchased $3.2 billion of its shares in the year’s first nine months. In the third quarter of the fiscal year 2022, the company spent $939 million. Stock buybacks are expected to remain at a similar level ($1.0B) in Q4’22. Any announcements regarding a potential acceleration of stock buybacks might be a powerful catalyst for PayPal’s shares.
The projection for PayPal’s fiscal year 2023 is the third indicator I will keep an eye on. Considering that PayPal’s revenue growth has slowed post-pandemic, the company’s forecast for the fiscal year 2023 might be a major driver for the stock later this week. For FY 2022, PayPal expects revenue growth of 10% in constant currency terms. But if growth trends downwards again in FY 2023, investors are likely to dump FinTech stock.
How much PayPal is valued
Earnings per share for PayPal are projected to increase annually by double digits over the next several years. It is expected that PayPal will earn $5.55 per share in FY 2024, giving the company a P/E ratio of 14.8 X. A higher P/E ratio seems reasonable, given PayPal’s robust free cash flow and secure payments operation, which comprises 432 million customers. Considering PayPal’s robust free cash flow generation, I think the company is properly priced at a P/E of 25 X.
PayPal’s stock risks
For PayPal, a major risk already manifested in FY 2022 is slowing top-line growth. FinTech stock prices will probably fall if the company reports net new active accounts decline on Thursday. At the same time, a rise in this metric for the fourth quarter would be good news for the firm. Paypal stock is anticipated to meet further pressure if FinTech predicts slower account growth (and engagement) for FY 2022.
Conclusion
I think investors should focus on these three variables most closely on Thursday: Net new active account growth (engagement), free cash flow, and growth projection for FY 2023 are the three key metrics for PayPal. Paypal stock may be driven into a new down-leg on Thursday if PayPal discloses slowing net new active account growth rates and presents a dismal revenue projection for FY 2023.
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