Why Have Some Giant Stocks Fallen 80%?

In this article, Alpesh Patel breaks down the trends of major stocks with a particular focus on Paypal. 

Since peaking at almost $300 per share in July 2022, PayPal has dropped nearly 80%. The crash has wiped out over $50m in market value. Shares in the payment processor haven’t been this cheap since 2016.

Major markets are down in bear territory – over 20% so far this year. However, those losses look small compared to other equities like Meta, Netflix, Etsy, and PayPal.

So what exactly is happening here? Were earning forecasts that inaccurate? Or is there more to this than meets the eye? Should we be bargain hunting? What can we learn and do we stay clear, or get ready to make some ridiculously lucrative deals which will payoff with 100%+ returns in a couple of years?

Sharescope’s Alpesh Patel Special Edition is invaluable to me at this time as I really want stocks high up on VGI indicator. But, special situations do arise outside of that. So let’s look at one.

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PayPal problems

Currently, Paypal is just above $70, having dropped 77% in under a year. It’s been a considerable fall from grace for the FinTech giant.

PayPal was one of the darlings of the pandemic era. As e-Commerce exploded, PayPal offered a safe and easy way to shop and send money online. As a result, it added users and revenue at an astonishing rate.

There are two big reasons the stock is down. Firstly, net cash flow and free cash flow have both dropped by around 30%. The removal of government stimulus and rising inflation have hit consumer activities and caused the company to seriously revise future projections.

Secondly, PayPal bet big on crypto. Just like other crypto-exposed stocks, they’ve taken a hit as the digital currency markets have headed into a tailspin.

However, while revenue forecasts are being revised, they’re still growing. New accounts are up 9%, and transactions per account are up 11%. As the company decouples from eBay, revenues are expected to increase. Many experts are suggesting it’s time to buy.

PayPal user growth

PayPal, alongside Netflix, has promised investors significant user growth. However, both businesses had to revise their predictions for 2023 amid a slowdown.

Paypal suggested they’d hit 750m users by 2025. However, in February of this year, it closed 4.5m accounts, citing “bad actors” who were taking advantage of rewards programs and incentives. It currently has around 430m accounts, and some investors are sceptical that it can beat out the competition and add to these numbers in time.

However, analysts suggest PayPal will increase earnings per share and sales during 2023.

Additionally, the company has been buying back shares at an alarming rate. In Q1 of 2022, it repurchased 11m shares at the cost of $1.5bn.

Netflix’s problems are considerably different. They face massive competition from the likes of Disney Plus, Amazon, Hulu, Peacock, and HBO max. Additionally, many media companies are choosing to keep their programming on their own platforms, which is hurting Netflix. Add to this that Netflix has the highest subscription fee, and their forecast of losing 2 million customers in the next few months and their share price losses make sense.

While both businesses have taken an enormous hit, the situations are different.

Tech stock correction

Tech stocks have had a rough 2022. Their values shot up during the pandemic, but missed earnings forecasts have led some investors to doubt they can maintain the momentum to justify high prices.

Rising interest rates and fears over the economy have played a big part too. On top of this, Growth stocks suffer during times of great inflation. These equities promise high future yields, but when inflation hits 8%+, those future payouts become far less valuable.

To add to those problems, the conflict in Ukraine, the reemergence of COVID-19 in China, and supply chain problems are all having a negative effect.

Should you buy the PayPal dip?

The present situation suggests that PayPal should be seen as a Value stock rather than a Growth stock. Its price-to-earnings ratio is down from 70 at its peak to around 20.

Secondly, it’s still a quality stock. The company is still growing, and it has a healthy balance sheet. While it might not be able to reproduce pandemic levels of growth, it can still expand.

As Warren Buffet suggests, value stocks with great fundamentals are always worth considering.

To state the obvious which is no bad thing in investing – not all falls are equal. Some may well stay beaten and only rise on wild speculation. Others are just genuine bargains. I rather think Paypal is a bargain and I will be buying more soon.

Alpesh Patel OBE

Founder, Alpesh Patel Special Edition of Sharescope and www.campaignforamillion.com to teach a million people to be better investors.