Account Growth Slows for PayPal in Fourth Quarter

PayPal (PYPL) maintained strong growth in terms of payment volumes in the fourth quarter, but other aspects of its results presented a somewhat sour note. We continue to believe the narrow moat company is well-positioned to benefit from secular trends over time, but an end to pandemic tailwinds and its eBay relationship could make for somewhat tougher sledding going forward. We will maintain our $151 fair value estimate.

In the quarter, total payment volume grew 23% year over year, and net revenue was up 13%. eBay was about a 900 basis point drag on revenue growth. Payment transactions per active account was up 11% year over year, maintaining the pace from the last two quarters.

The biggest negative surprise in the quarter was net new active accounts, which were up 9.8 million sequentially, including 3.2 million added through the acquisition of Paidy. This was well below expectations. In part, this appears to be driven by management disqualifying 4.5 million accounts following an internal review. However, management also noted that the company expects to add only 15-20 million accounts in 2022. This suggests a rate of account growth not only below the level seen during the pandemic, but also below prepandemic levels. Management noted that incentive programs to add accounts have been proven to have relatively poor economics, as accounts acquired through incentives tended to churn quickly. As a result, management is pivoting investment to focus on engagement of existing accounts. While this switch makes strategic sense to us, we think the situation highlights the fact that PayPal’s heady growth will not be without its hiccups.

Adjusted operating margins declined to 21.8% from 24.7% last year, largely due to a lower transaction margin. Management stated, however, that they expect investments made this year to lead to leverage next year in terms of non-transaction-related expenses.