Paypal’s share price showed exceptional growth during the pandemic but plummeted to 2019 levels in 2022 after growth started to slow.
Paypal was formed from the merger between X.com and Confinity. X.com was an online bank co-founded by Elon Musk in 1999, while Confinity was a payments company founded in 1998.
They merged in 2000 and changed their name to Paypal, specialising in internet money transfers. The company was sold to eBay in 2002 and spun off as an independent firm in 2015.
Paypal continues to specialise in online payments but also offers financial services like short-term business financing, invoicing, and gateway services.
Transaction facilitation is the company’s largest revenue driver, contributing over 92% of Paypal’s revenue.
Paypal showed rapid growth following the eBay acquisition because of payments on the eCommerce platform.
eBay gave it the launch pad to expand its operations and become a household name in online payments and money transfers.
Paypal’s share price experienced exceptional growth and increased from $35 in 2015 to its peak of $304 in 2021.
Between 2020 and 2021, Paypal traded at an average price-to-earnings (P/E) ratio of 70 times with a peak P/E ratio of 109.36.
Many investors felt that Paypal’s innovative payment systems would continue to be disruptive, and its high valuation would be compensated with increased growth.
However, some analysts warned that Paypal was grossly overvalued.
In a 2020 interview with CNBC, Chantico Global founder and CEO Gina Sanchez said Paypal was highly overvalued compared to other credit card service companies such as American Express.
She argued that, although the payment method differs, both companies are driven by the same underlying factor – transaction volumes.
In late 2021, Paypal’s share price came under immense pressure and fell from a high of over $300 to below $100 in 2022.
As inflationary pressures increased and an interest rate hiking cycle became more probable, investors saw a difficult time ahead for Paypal.
However, the macroeconomic conditions were not the main reason for the price drop.
At the end of 2021, Paypal’s management gave its outlook for the 2022 financial year with its growth estimates.
Revenue and profit projections were lower than previous estimates and below analysts’ expectations.
It concerned many investors as it seemed like Paypal had reached the end of its growth stage. The company’s core performance measures substantiate this view.
The chart below shows the total purchase value of all transactions processed by Paypal in a trailing year with a quarterly step.
It reveals that the increase in value of the transactions has been slowing since mid-2021.
Paypal’s growth slowdown can also be seen in its client base over the last few years.
The company enjoyed strong client growth for two decades but started to slow in 2019. There was no increase in clients from Q1 2022 to Q2 2022.
The slowdown in client growth and transaction volumes reveals why many investors dumped the stock in search of more value.
Paypal is viewed as a growth stock, and the premium paid for the stock was valued on the company’s expected growth.
As soon as the company showed signs of deteriorating growth, the premium paid for the stock quickly lost its value.
Paypal is still trading at an elevated P/E ratio of 51 times, and if its growth continues to slow, it may still be overvalued.