INTRO: After the closing bell on February 1st, 2022,
PayPal’s CFO, John Rainey, forecasted that due to a variety of hurdles and challenges,
investors should be more cautious about the short-term future of PayPal.
Usually, such an announcement may cause a 5 or 7% decline after hours, but PayPal stuck tumbled 18%
after hours. At this point, executives and investors likely hoped that a new trading
day would be much kinder to PayPal and that the fear would subside. But, on February 2,
losses just continued to compound and PayPal would end up posting their worst trading day
ever losing a painful 24%. Since then, PayPal has continued to bleed falling a total of 30%.
Now, this decline itself would be considered a bear market given that the sell-off is more
than 20%. But this is just the most recent of PayPal’s losses. Since the end of July,
PayPal stock has crashed a total of 60% which correlates to over a $200 billion loss in market
cap. Clearly, PayPal stock is experiencing a mini depression, so what happened to PayPal?
BAILED OUT: Taking a look back, one
of PayPal’s biggest shortfalls was that they were never able to achieve a sustainable operation by
themselves. Like many startups, PayPal had a rough time turning a profit in the early days. But,
despite their lack of profitability, they did have millions of customers thanks to the rapid adoption
of the internet. Focusing on customers as opposed to profits was perfectly fine throughout the late
1990s as it was pretty easy to source funding, especially for a rapidly growing fintech company.
But all of this would change at the turn of the millennium with the burst of the dot-com bubble.
By 2001, it was clear that PayPal needed to focus on profitability if they wanted to survive,
but their CEO, Elon Musk, seemed to be distracted. Elon wanted to grow PayPal into a comprehensive
financial platform and transition their servers from Linux to Microsoft. While these ambitions
may have been best for the company long-term, the other executives felt that Elon was forgetting
about the main priority which was turning a profit. So, while Elon was on vacation,
they decided to go ahead and fire him, and Peter Thiel would takeover. This shifted the company’s
focus in the right direction, but they still had a long way to go. eBay had announced a partnership
with Wells Fargo to launch their own in-house payment system called Billpoint. And given that
61% of PayPal’s revenue came from eBay, this was not good by any means. In fact, this extreme
dependence on eBay was the primary reason that both Google and Yahoo refused to acquire PayPal.
The only company willing to acquire PayPal was eBay, but they had a pretty predatory offer.
They offered $400 million and said quote “We are going to make this offer once and then crush you,
you should really take this offer.” Considering this, Peter decided to throw a hail mary by taking
PayPal public in February of 2002. Just a few years ago, this would’ve been easy money, but this
was at the peak of the dot-com crash, so investors were extremely conservative. Nonetheless, the IPO
valued PayPal at $1.2 billion which just goes to show how predatory eBay’s initial offer was.
Seeing this, eBay realized that they had lost the bidding war, but didn’t want to also lose PayPal,
so they offered a much more reasonable $1.5 billion. And given the poor financial state
of PayPal, Peter decided to simply give in and sell the company. Peter had successfully defended
PayPal from a predatory acquisition, but he didn’t save PayPal from their dependency issue. And now
that eBay had control of PayPal, this dependency would just get worse over the next decade.
GOLDEN CHAINS:
Even though the acquisition was breeding an unhealthy dependency on eBay, the acquisition was
quite beneficial in the short term. eBay basically eliminated PayPal’s profitability issues overnight
as they were comfortably able to absorb their losses. Similarly, now that PayPal and eBay were
no longer competitors, there were no threats of eBay dropping support for PayPal. So, PayPal could
just focus on growth once again, and this was relatively simple as well. They basically had the
entire eBay marketplace to go after, but at the same time, this heavily limited their potential.
A perfect example of this is the explosive rise of Venmo. Venmo wasn’t founded till 2009,
or over a decade after PayPal, yet they dominate the peer-to-peer market today. In fact,
Venmo is so popular that Venmo has become a verb like Google. Another great example of PayPal’s
stagnation was Square. Square was founded in 2009 as a simple financial services company,
yet they’re worth $60 billion by themselves today. In both of these cases, you would think
that PayPal had a massive advantage and that they would’ve crushed Venmo and Square, but under eBay,
that wasn’t really possible. Now, this isn’t to say that PayPal was doing bad. They were rapidly
growing in their own little bubble surpassing 100 million active users in 2011. So, PayPal’s
stagnation was more of a lack of expansion as opposed to a lack of growth in their own niche.
Such expansion efforts were the key to evolving into a diversified financial services business,
but instead, PayPal was stuck under the golden chains of eBay. But, PayPal wasn’t the only one
that was being hindered by the other. You see, it wasn’t that beneficial for eBay to keep PayPal
around either because there wasn’t much synergy between the two companies. Sure, PayPal gave eBay
control over payments on the platform, but to get this control, eBay had to support PayPal in their
non-eBay-related business endeavors as well. In 2013, for example, PayPal realized that they were
losing in the peer-to-peer market, so they decided to acquire Braintree or Venmo for $800 million.
This was a great acquisition for PayPal, but guess who had to pay the bill.
Now, it’s not like eBay didn’t want PayPal to succeed, it’s just that they didn’t have very much
in common. For a partnership to work, you need to be able to share resources and minimize costs.
For example, Facebook already had a bunch of app developers and social media experts
on board when they bought Instagram. So, the companies could easily share resources. But,
it’s not like eBay just had a bunch of financial analysts and credit card experts laying around.
So, from eBay’s perspective, it felt like they had the burden of running a whole nother company
when all they wanted was an integrated payment platform. And with time,
it became more and more clear that it was best for both companies if the duo split ways.
ESCAPING EBAY:
In late 2014, eBay announced that they would be spinning off PayPal into their own business once
again. The plan was to take the company public on the Nasdaq, and eBay investors would get 1
share of PayPal for every share of eBay they owned. Aside from this, eBay announced that
they would continue working with PayPal up until 2020 at which point they’ll switch over to Adyen
for payment processing. However, they will still support PayPal as an option up until July of 2023.
So, PayPal had plenty of time to grow their business outside of eBay,
and this time it was much easier than their attempt in the early 2000s.
PayPal was an established and trusted brand now which made it much easier for
them to garner new online merchants. On top of this, PayPal was finally profitable as well,
so they didn’t have to constantly worry about raising more capital. Instead, they could
use their profits to buy out other companies, and that’s exactly what they did. Since 2016,
PayPal has completed a total of 12 acquisitions with the most famous ones being iZettle and Honey.
It wasn’t all smooth though. Right before PayPal broke off from eBay in mid-2015,
their draft terms of service got leaked, and one portion of their TOS especially caught people’s
attention. The TOS outlined that PayPal had the right to robocall and auto-text users at will,
and if customers didn’t agree to this, they were forced to shut down their accounts.
To make things worse, PayPal had just paid $25 million in fines regarding deceptive
business practices. So, the last thing they needed right before their IPO was another PR nightmare.
Nonetheless, Paypal did end up working through these issues, and over the next couple of years,
they were able to double their annual income from about $1 billion to $2 billion. But the
real growth didn’t come till 2020 when the pandemic came around. As you would guess,
when people were locked at home, they were much more likely to use online-based financial services
as opposed to traditional financial services. People were also spending much more money online
which just further accelerated PayPal’s growth. Despite all this growth though,
expectations were even higher, and PayPal was soon not able to live up to the hype.
DISAPPOINTING EXPECTATIONS:
As soon as the pandemic hit, investors flocked towards technology stocks. They dumped their
positions in airlines, restaurants, and hotels, and all this money flooded into tech. This led
to one of the most explosive runs in PayPal’s history. From their pandemic low, PayPal rocketed
244% within the next 12 months. This translated to a 760% return since IPO or an 8.6X return.
But the problem was that PayPal’s bottom line had only grown about 5X which meant
that PayPal was relatively overvalued by 72% compared to their IPO valuation.
To make things worse, PayPal’s net income was beginning to stagnate at about $5 billion.
And as investors started to realize that maybe they gave PayPal a bit too much credit
and that the stock was relatively overvalued, they started to sell. This sell-off didn’t just
affect PayPal either. Investors had bid up all stay-at-home stocks beyond belief, and now they
were taking profits left and right. By the start of 2022, PayPal stock was already down about 40%,
and the poor guidance was the nail in the coffin. Looking back though, PayPals tumultuous history
was never their fault. It was almost always due to their circumstances. Initially, PayPal
struggled to stay afloat in the funding drought that followed the dot-com bubble. This forced them
to join eBay which largely limited them into eBay’s marketplace bubble for over a decade.
After they finally spun off from eBay, they had to spend years diversifying and building
a business that didn’t solely depend on eBay. And just as they escaped eBay’s golden chains,
they got caught up in the tech runup that followed the covid crash. But, despite all
these setbacks and hurdles, one thing that has remained constant is PayPal’s resilience, and
I don’t think that’s changed. In fact, I think a lot of investors are sleeping on PayPal right now.
Just a couple of months ago, PayPal announced that Amazon would start accepting Venmo in 2022.
Now, personally, I don’t think anybody should be using Venmo to pay for goods on Amazon when they
could be earning cashback or rewards using credit cards. But, regardless of what I think or what is
the smartest financial decision, I’m sure there’s gonna be loads of people using Venmo on Amazon.
And even if PayPal only captures a couple of percent of Amazon’s marketplace,
we’re talking about tens of billions of dollars worth of transactions every year. On top of this,
I think it’s highly likely that people who got used to PayPal’s services during the pandemic will
just continue to use their services more after the pandemic whenever that is. So, I think it’s just
a matter of time until PayPal switches this year or two of stagnation into a decade of growth. But
that’s just what I think and it’s not financial advice. Do you guys use PayPal? And if so,
what do you use it for? Comment that down below. Also, drop a like if you think PayPal’s recovery
is inevitable. And of course, consider checking out our international channels to watch our videos
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