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The future of PayPal Holdings Inc. (PYPL) has 4 red flags
PYPL was formerly regarded as one of the best long-term investments in the rapidly developing digital payments business.
Firstly, PYPL predicted during its investor day presentation in February that the number of active accounts will nearly double from 377 million in 2020 to 750 million in 2025 and that revenue would more than double from $21.5 billion to $50 billion. PYPL's active accounts increased by 13% to 426 million in 2021, while revenue increased by 18% to $25.4 billion. However, it unexpectedly abandoned its aim of 750 million active accounts in its fourth-quarter report. The timing of the statement, which came only a quarter after CEO Dan Schulman declared he was "very confident" in meeting the target, raised alarm bells.
Secondly, rather than aggressively obtaining new accounts, PYPL intends to increase its average revenue per user (ARPU) by rolling out new features and locking consumers into developing platforms like Venmo, which had over 83 million users in the United States by the end of 2021. That's up 19% from the end of 2020, when there were just under 70 million accounts.
Venmo, meanwhile, is still up against Zelle and Block's Cash App, two other peer-to-peer payment networks.
Thirdly, PYPL should increase its personnel if it wants to provide new features to its financial ecosystem. However, when a new chief information security officer came over in January, the business apparently just cut off its emerging technologies research team, which was in charge of encryption, quantum computing and distributed ledger technology.
Although the team was small (just four employees), it signifies a trend away from experimental technologies as the company's primary platform's development slows. As a result, if PYPL's products fail to attract new customers or significantly increase the company's ARPU, other staff may be laid off.
Finally, John Rainey, PYPL's CFO, just quit to accept the same role at Walmart. Rainey had been the CEO of PYPL since the company was carved off from eBay seven years ago and his resignation raises even more alarm bells.
PYPL's stock has been hammered but it is still not a bargain. Over the past year, it has frequently over-promised and under-delivered and its management has plainly become complacent in the face of increasing competition.
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