Should I load up on PayPal stock after last week’s plunge?

Last week, shares in PayPal (NASDAQ: PYPL) plunged more than 20% after the company reported its Q4 earnings. It’s fair to say the results, and the outlook, were below investors’ expectations.

As a PayPal investor myself, I’m now wondering what the best move now is. Should I load up on more PYPL shares at a lower price? Or should I cut my losses and sell the stock? Here are my thoughts.

Why PayPal’s share price tanked

Let’s start by looking at what caused PayPal’s share price to tank. To my mind, there are a few issues at play here.

The first is that management has changed its strategy. Last year, management was saying that its goal was to hit 750m users by 2025. That would have represented significant growth on the 400m or so users it had in 2021.

However, it has now said that it’s no longer focused on achieving this 750m target in the medium term. Instead, its goal is to boost user engagement. That’s because it has realised that engaged users bring in far more revenue than users that are minimally engaged.

I actually think this is the right move in the long run. However, the strategy shift – which has clearly spooked investors – has raised some questions about management’s credibility.

Secondly, eBay’s migration to managed payments has hit revenues. This migration – which occurred faster than anticipated – put $1.4bn of pressure on the company’s top line in Q4, and is likely to put another $600m of pressure on the top line in the first half of 2022. I see this as a short-term issue. However, again, it raises some questions about management’s ability as it didn’t anticipate the speed of this migration.

Third, guidance for 2022 was below expectations. Before the earnings, Wall Street had been expecting revenue growth of 18% for 2022. However, PayPal said that it now expects growth of 15-17%.

Looking at these issues, there’s nothing that’s a deal-breaker for me. Having said that, the leadership team really needs to deliver now. If future results come in below guidance, I’d expect PayPal shares to be crushed.

Is the growth story still intact?

Moving away from the negatives, there were certainly things to like in PayPal’s Q4 earnings.

For starters, total payment volume (TPV) for the year came in at $1.25trn, up 33% year on year.

Meanwhile, PayPal advised that its ‘super app’ is showing “extraordinarily promising early results” and leading to much higher levels of revenue per user.

Additionally, it said that it’s having a lot of success with buy-now-pay-later (BNPL). In Q4, growth here was 325% year on year.

This leads me to believe that the growth story is still intact.

Is there value on offer?

Turning to the valuation, PayPal advised that it expects earnings per share of $4.60 to $4.75 for 2022. This means that at the current share price, the forward-looking P/E ratio is about 27.

In my view, that valuation is about right given what’s going on right now. In other words, I don’t see PayPal stock as particularly cheap. To my mind, it’s probably fully valued at present.

PayPal stock: my move now

Putting this all together, I’m not going to buy any more PayPal shares at the moment.

I will hold on to my current position for now. However, I won’t be buying more stock until I see that the company is achieving its goals.