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PayPal: fake awakening leaves payments group undervalued

  • February 2, 2022
  • Staff
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Fake accounts have long caused problems for social media companies. Now “illegitimate accounts” have become an issue for PayPal too. The US payments group, itself closely associated with the internet revolution, shut down 4.5m accounts in the final quarter of 2021. It found “bad actors” were taking advantage of its rewards programmes. As a result, it is forecasting slower user growth this year and abandoning its long-term target of reaching 750mn active accounts by 2025.

The timing is bad. Having benefited from the surge in online shopping during the pandemic, PayPal’s growth is falling away as people return to physical stores. The company claims inflation and supply chain delays are also making shoppers think twice about clicking on the Pay Now button.

Meanwhile eBay — once the mother lode of customers — is weaning its sellers off PayPal and on to its own payment system.

Even so, a 26 per cent slump in PayPal’s share price on Wednesday looks overdone. At 36 times forward earnings, the stock is now one of the least expensive in the hyped-up payments sector. Block, formerly known as Square, trades on a multiple of 65 times. It is smaller than PayPal, though growing more quickly.

But PayPal deserves credit for knowing when to cut its losses. To attract new users, the company started offering cash incentives. This turned out to be a costly marketing exercise that did little to help permanent customers. Bot farms opened accounts to take advantage of the offer and then left. 

PayPal now believes it will add just 15-20mn net new active accounts this year, a significant slowdown from the 49mn it added in 2021. But user growth is not the only important metric. How much existing customers spend matters just as much to the top line.

PayPal’s forecast is for total payment volume to increase by as much as 23 per cent and revenue to climb up to 17 per cent this year. Its previously announced Venmo partnership with Amazon could be a catalyst for further growth. Developing a bigger in-store transaction presence would also help. The stock remains worth keeping in the checkout basket.

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