PayPal (PYPL) warned back in February that its sales and growth in new active users would fall short of forecasts. Chief Financial Officer John Rainey said the combination of inflationary pressures, supply chain problems and a lack of fresh stimulus from the federal government has weighed on consumer sentiment and spending.
PayPal released its first-quarter results after the close on Wednesday. Revenue rose 8% year over year, slightly ahead of forecasts. Earnings fell sharply year-on-year and guidance came in below estimates. After the close of business, the stock was up a bit.
To make matters worse for PayPal, Rainey plans to leave the company soon after seven years. The tech company surprised Wall Street earlier this month when it announced that Rainey would become the new CFO at Walmart (WMT) and leave PayPal at the end of May.
The company is looking for a permanent replacement. But until one is found, Gabrielle Rabinovitch, senior vice president, corporate finance and investor relations at PayPal, will be interim CFO.
“PayPal is in an uncomfortable kind of purgatory after John Rainey left,” said Andrew Bauch, senior analyst at SMBC Nikko Securities America.
Investors are also nervous that the company may have to lower its outlook again.
“This appears to be a situation where current management may need to reset guidance further to lower the bar for a new CFO to enter,” said Jordan Kahn, chief investment officer of ACM Funds.
Kahn said his company sold PayPal shares in January ahead of the company’s last earnings report on growth concerns. But he still likes the long-term prospects for the stock and said he’s waiting for the right moment to potentially get back in.
Another concern? Consumers are beginning to return to brick-and-mortar retailers for shopping as Covid fears ease thanks to vaccinations and less deadly – albeit more easily transmissible – variants of the virus.
That means consumers may be making more purchases using credit and debit cards or cash in physical stores and making fewer digital payments for online purchases, said Christopher Vecchio, senior strategist at DailyFX.
Given the growing rivalry in digital payments, should PayPal make a deal?
Competition is also intensifying, and that’s not helping. PayPal and Venmo are in an all-out battle for users with companies like Block (SQ), the parent company of Square and Cash App, andzelle, the fintech owned by a consortium of seven of the country’s top banks, including Bank of America (BAC) and JPMorgan Chase (JPM).
However, PayPal could benefit if Block CEO Jack Dorsey decides to become more involved with Twitter following its acquisition of Elon Musk. Dorsey used to be the CEO of both companies, and some believe a distracted Dorsey was good for PayPal.
“If Dorsey would become a part-time CEO who was back at Twitter, that could help PayPal and open the door for them to gain traction,” Vecchio said.
Kahn agreed that Dorsey would focus more on Twitter, “great for PayPal,” but he thinks that’s unlikely. That means PayPal has to work harder to revive user growth.
The sluggish outlook could prompt the company to consider further acquisitions to rejuvenate sales and earnings. Late last year there was speculation that PayPal was looking to buy social media company Pinterest (PINS), but PayPal has said no deal is in the works just after the layoffs announced Tuesday. Bauch said he wouldn’t be surprised if PayPal tried to get involved in “some creative mergers and acquisitions” to spur growth.
The question is whether PayPal investors, who have firmly placed the stock in Wall Street’s penalty box, would agree.
But Kahn said the good news is that after this year’s market slump, most fintech companies are in the same boat as PayPal. That means they’re all a lot cheaper — and potentially ripe for takeover.