FY2022 highlights
- Total Payment Volume (TPV): $1.36 trillion, up 9% YoY
- Transactions: 22.3 billion, up 16% YoY
- 435 million active accounts at the end of 2022, including 8.6 million net new active accounts and 35 million active merchants
- Net revenue: $27.5 billion, up 8% YoY
- Free Cash Flow: $5.1 billion, up 4% YoY. FCF margin of 19%
- Braintree made up 30% of PayPal TPV in 2022, growing 40% YoY
- BNPL totaled more than $20 billion in transaction volume since launch, growing 160% YoY in 2022
- Venmo has 90 million active accounts, including 60 million monthly actives, and exceeded $100 million in monthly revenue
Uncertainty at the top
PayPal earnings took a backseat to the announcement that CEO Dan Schulman is retiring at the end of 2023. A seasoned leader with years in leadership positions at global companies like AT&T, Priceline.com, American Express and Virgin Mobile, Dan became the CEO of PayPal in 2014. Here are a few headlines of what he has achieved:
- Taking the company public in 2015, concluding the separation from eBay
- “Under his leadership, PayPal’s market cap growth has outpaced the S&P 500. Revenues increased from $9.2 billion in 2015 to $27.5 billion in 2022, with total active accounts more than doubling to over 430 million in 200 markets. Total payment volume grew 5X from $288 billion in 2015 to $1.36 trillion in 2022” (PayPal)
- Ending a long running feud with card networks in 2016, opening up opportunities for PayPal
- Acquiring multiple companies, notably Paidy, iZettle, Honey, Xoom and Happy Return
A lot of people have leveled criticisms at the CEO and his leadership, after PayPal’s stock price dropped by almost two-third in 2022. They speculated that he was being pushed out of his job politely, instead of retiring voluntarily. I don’t know what goes on in PayPal’s boardroom, so I cannot dispute such a claim completely. But personally, I think that Dan is going out on his terms. Here’s my reason.
First, the CEO recently bought PayPal stocks worth of $2 million, bringing his stock purchase to $3 million since 2022. That’s not a sign of someone who is shown the door. The purchase signals that the CEO believes in the brighter future for PayPal and that he doesn’t harbor ill will towards the Board. Second, it’s how the announcement on his retirement was made. When Disney wanted to dismiss Bob Chapek, they did it in the most ruthless manner. No touting his achievement. No time given between the announcement and the dismissal. And we haven’t heard the Executive team publicly thank Chapek for his work. In Dan’s case, the departure seems planned and more cordial. The company put out a press release to show him gratitude. And he is leaving at the end of the year, giving PayPal time to settle on a new leader.
Last but not least, it’s what the CEO said himself:
I felt there were two important considerations in terms of timing. First, I wanted to be sure that PayPal had positive momentum and was in a position to deliver a solid year of performance. So I can be sure I wasn’t leaving the company in a difficult position. And second, it was important to me that the Board have enough time to conduct a thorough search and have a reasonable transition period.
Of course, I will be flexible in my time frame in order to assure we seamlessly onboard the ideal next leader of PayPal, and I look forward to continuing to serve on the PayPal board. I’m eager to see the next CEO build on all we have accomplished in the last eight and half years and seize the immense potential ahead of us. In the meantime, I will remain fully focused on maintaining our momentum and executing on our plan.
I had two criteria for when that right timing was. I mean the first one was I wanted to be absolutely sure that PayPal was on solid footing with a bright future. And as we look at kind of the quarter we delivered in Q4, as we look at what’s happening in Q1 right now, which is coming in much stronger than we anticipated across a wide variety of fronts, we feel that 2023 is shaping up to be a strong year. And we think we have a real nice glide path as we go into ’24 as well. And so that kind of like leaving the company in a good place seemed to be a good time for that.
The man is 65 years of age and has worked a long career. It’s sensible for him to think about the next chapter in life. That, to me, makes a lot of sense and indicates this decision comes from Dan himself, not the Board.
With that being said, the upcoming departure of the sitting CEO & President paints uncertainty on PayPal’s outlook. The company has to look for a new CEO and since September 2022, it has been running without an official CFO, who is on a medical leave. In addition, the long-time Chief Product Officer, Mark Britto, is retiring as well. The uncertainty around these three key positions in a complex operation like PayPal is undoubtedly a major concern as it affects long-term planning and execution.
Cost-cutting is great, but is it a bit too late?
The management team has been beating the cost-cutting drums for a while. Back in Q2 FY2022, they set a target of $900 million and $1.3 billion in cost savings for FY2022 and FY2023 respectively. This month, they revealed further savings of $600 million in expenses, on top of the $1.3 billion target, which come from a layoff of 2,000 employees, a reduction in external vendor spend and a decrease in real estate footprint.
This commitment to efficiency is in stark contrast to how wasteful the company was before. Previously, growing the number of active accounts was all the rage. It was one of the key goals proudly set, yet subsequently abandoned by the management team. Now, it’s about cost management and using capital wisely in key initiatives such as PayPal Complete Payments, Passwordless, Venmo or enhanced checkout.
I mean, upgrading the product and service suite to stay competitive as well as growing the addressable market are great. However, I wonder if it’s already too late and if PayPal squandered a golden opportunity in the last two years. Why do I say that?
First of all, the competition is pervasive and fierce. Every market that PayPal competes in, there are established and well-funded competitors, from Apple Pay in checkout, Affirm in BNPL, to Square, Clover, Adyen and Stripe in payment processing. In some areas, PayPal is at technical disadvantage. For instance, Apple Pay has exclusive access to the NFC chip and native on Apple devices. In other areas, the iconic brand has to play catch up. The CEO admitted that Square has done a much better job monetizing Cash App debit card than PayPal has with its own cards. PayPal Complete Payments, an unbranded version of Braintree for SMBs and midsized businesses, enters a crowded field that features the likes of Square, FIS, Adyen or Payrix.
Even when they have to operate in highly competitive fields, PayPal would still have a chance to dominate and win. But there are instances where I call into question such a possibility. Cash App bought the tax filing division of Credit Karma to drive inflows. What has been the appropriate response from PayPal? Absolutely nothing. In addition, Square launched Tap To Pay on iPhone for its US sellers last September. Meanwhile, PayPal will only plan to launch its own version a full year later. Last but not least, PayPal has had trouble monetizing Venmo whereas Cash App is the key profit drive for Square.
We’re updating the debit card. We’re behind Cash App there. We really need to do better on the debit card. We are really looking fully at that rewards piece of it. Business profiles with Apple Tap to Pay, I think, to be meaningful. It’s in pilot. It’ll really start to ramp at the end of Q1 into Q2. So, a lot there. And we’re doing a lot of redesign on the app itself.
All that said, there’s a lot going on there, but we have a lot more work to do, as I mentioned, to turn potential into reality. I think there are a lot of green shoots, but they need to grow and I’m not as happy with our performance on Venmo as I would like to be. It’s obviously a key part of our portfolio growing nicely, but there’s more we can do with it.
Source: PayPal Fourth Quarter 2022 Analyst Call
By no means am I suggesting that PayPal is an easy business to run. On the contrary, it is a highly complex business, even from the outside looking in. All I am saying is that the strategic mishaps in 2021, the level of competition, the failure to get feature parity with competitors and the uncertainty at the top give myself, a shareholder, some major concerns over the outlook of the company. For good measure, because PayPal is highly dependent on discretionary spending, it’s anyone’s guess how the challenging macro-environment and persistent inflation would mean for FY2023 and beyond. In fact, even PayPal’s executives didn’t provide revenue outlook for FY2023. For all of these reasons, while PayPal is trading at a lower price than before Covid, I am still reluctant to increase my position on the company.
Minh Quang Duong 