Share Price Drops But Company Profits Rise...?

It is often easy to see a company’s share price take a hit and assume that the business itself is suffering. Investors are, however, fickle – the price quoted does not always reflect the true potential a company has for long term growth.

PayPal was one of the biggest success stories from lockdown. The world suddenly had nothing to do but stay inside and online shop. PayPal saw its user base grow to 426 million, whilst its sales volume increased by a third during the 2020/21 financial year. The share price reflected these results, rising almost 180% from March-20 to March-21.

Unfortunately for PayPal, not all good things last. The payments giant faced its worst day on record after publishing disappointing revenue and profit forecasts for 2022. Shares dropped by 26%, wiping £50 Billion from its market value. In the year to April the share price is down 57%, reflecting investors continuing unenthusiastic feelings towards PayPal’s future. But is this reduction necessarily reflective of the firm’s prospects?

Paypal’s CFO John Rainey commented: “We arguably just had one of the best years in our history when you examine our financial metrics, eclipsing $25bn in revenue and generating almost $5.5bn in free cash flow… By virtually any measure, we are a market leader in digital payments, and we will continue to grow faster than the market. There are very few companies of our size with our global reach, with our growth rate, and cash generation."

Nick Train (co-founder of Lindsell Train) in his February report to investors spoke at great lengths about PayPal and what he called their “transient” popularity with investors. Nick reasoned that the fall was likely due to Paypal signaling slower revenue growth, having only predicted a 20% uptick into 2023.

"But even post-pandemic, the broader e-commerce trends benefitting PayPal are not going away, and there was a lot to like about the results," Nick reasoned. "At a time when competition is front of mind, not only is PayPal's acceptance (at 76% of the top 1,500 US/EU retailers) still almost three times that of their nearest rival, but it also gained 2% of share at the checkout. With pricing power topical in today's inflation-spooked environment, we note that PayPal raised merchant prices by over 50 basis points yet simultaneously signed up a further five million." He added: "This doesn't mean competitive threats can be ignored, but the company clearly has a strong position to defend in a rapidly growing industry."

Even if the PayPal’s value slows (particularly when compared to its performance during the first year of the pandemic) Nick noted that "eternal 30% growth was never part of our long-term thesis". He further commented, saying "We would argue that if top and bottom-line growth can be sustained at mid to-low double digit rates for anything like the long term, then today's generous free cashflow yield of over 4% represents extremely good value," he continued. "PayPal is a robust business and so are the other key holdings in the portfolio. Diageo, Heineken, LSE, Mondelez, Nintendo, RELX and Unilever will each be impacted by

2022 macro and geopolitical events, separately and differently, but we have no existential worries about their brands and franchises.

"Investors sometimes forget - survivability is a valuable characteristic."

We are all susceptible to getting caught up in the headlines - “Growth Slowing” “ Bad Forecast” - but the sagacious investor must always look at the business at its core.