PayPal shares dropped by nearly 25% last Wednesday because of its disappointing earnings and the uncertainty over its future growth.
There were a lot of factors that may have contributed to the company’s meager 13% year-over-year revenue growth.
- Unable to meet or exceed last year’s figures
- Effects of COVID-19 on the economy
- Stoppage of the government stimulus program, which left consumers with less cash than when they were receiving financial help
- Weak e-commerce following the holiday season
- The effect of inflation on PayPal’s user base
- Supply chain problems, which affected the company’s merchants
- The effect of eBay adopting its new payment system
Although these factors have significantly affected the company’s growth this quarter, none of them pose a long-term impact on its business. If that’s the case, the next question would be why did PayPal’s shares go under after the earnings report?
One of the major reasons why its shares dropped can be attributed to the company’s plans for expanding its TPV or total payments volume in the future.
To put it simply, TPV refers to the overall dollar volume that’s transacted within the platform during a specific period. The company takes out a fee for every transaction that takes place through its platform. If the company wants its revenue to grow, it has to boost its total volume.
PayPal’s TPV last year reached a whopping $1.25 trillion, which proves that it’s only one of the few companies that can handle such a massive payment volume.
The company knows how to attract new users to its platform. However, PayPal said last week, during its earnings call, that it plans to slow down its acquisition of new users.
According to CEO Dan Schulman, PayPal’s business follows the Pareto Principle. One-third of its customer base is responsible for the majority of its TPV. The company has realized that over incentivizing user growth leads to more fraudulent accounts, which it is trying to get rid of.
Therefore, the company plans to shift its focus on catalyzing TPV by encouraging higher engagement among clients and monetizing its existing user base more efficiently.
This doesn’t mean that PayPal will stop growing its user base. It still wants to grow but it will no longer put much focus on adding net new user accounts. Instead, it’ll concentrate on average revenue per user and other monetization metrics. This plan will prove to be beneficial for PayPal in the long term.
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