PayPal (PYPL) got a lot of the headlines in the latest batch of quarterly reports, but from where I’m standing, the real market-moving relief came from Starbucks (SBUX). Big Tech is holding up better than feared . . . but Big Brick And Mortar is hotter than ever.
Start with PYPL. Decent enough numbers, with revenue edging up 9% above last year’s level. Factor out exchange rates, you can squeeze an extra 1 percentage point of top-line growth there.
But factor out the company’s one-time parent and crown jewel EBAY and revenue jumped 14%, which suggests sluggish transaction activity in that critical sales channel.
And as management pointed out, this comes on the back of a 32% revenue spike a quarter ago. Growth is plateauing. The old heady days when PYPL could surge along on a 20% revenue trend year after year seem to be over.
Management faces a difficult choice. They can either chase growth by investing in strategic initiatives . . . or accept that they’ve taken their business model roughly as far as it goes. In that scenario, they can focus on profitability and maybe even start paying dividends.
That’s apparently what they’re doing. Major shareholder Elliott Investment Management is lobbying for a review of alternatives to the existing capital return program, which basically boils down to buybacks right now.
But to pay a dividend, you need to be profitable. On a GAAP basis, PYPL actually swung to a loss . . . and factoring out non-recurring charges, earnings actually dropped 20% from last summer.
This is a company doing 9-10% more business than it did a year ago. And yet costs ate up every additional dollar that came in. All that growth, all the initiatives, all the acquisitions didn’t help the bottom line one bit.
Growth like that just isn’t worth chasing unless there’s an endgame in mind. And when revenue across the S&P 500 is up 12.3% from last year, it isn’t even a great growth rate. It’s slower than average. Sub par.
Don’t get me wrong. I love PYPL and want it to succeed. But this is not the hypergrowth story that had shareholders cheering for years before the pandemic pushed the stock beyond $300.
These numbers argue compellingly that PYPL didn’t deserve to drop below $90. We’ve just watched three months of dread evaporate. That’s worth a big bump. The question is what it takes to get the stock to recover another 25-30% and start testing the April high again.
And the real point is that if PYPL isn’t a growth machine any more, the whole reason a lot of investors gravitate toward the big tech names seems to be broken. Visa (V) boosted its revenue 19% this quarter. Which is the growth company now?
I’ve been anticipating a reckoning in the tech group for a few years now. Names like Microsoft (MSFT) and Apple (AAPL) are now effectively value stocks: not growing too fast or changing the world too dramatically, but providing regular dividends.
Maybe it’s time for PYPL to join them. Remember, it’s officially a “financial” stock now anyway . . . one of the bright points in that stodgy sector, but a long way from changing the world.
Meanwhile, the world goes on. The world of coffee and people getting out of the house. Starbucks (SBUX) is now roughly the same market capitalization as PYPL now.
Like PYPL, the coffeehouse chain has seen better days. Last summer, it was a $120 stock.
But last summer, SBUX booked $0.99 per share in profit from recurring operations, yielding a valuation of something like 30X annualized earnings. Down here below $90, earnings have come down significantly . . . but the multiple has also dropped to a 24-25X level.
Dollar for dollar, the stock is cheaper than it was last summer. And revenue keeps powering along at a 13% rate . . . faster than PYPL. If you’re looking for a hot sales trend, this is it.
The consumer market is booming. Tech is slowing. Neither of these companies is sailing past the inflationary winds . . . but growth is radiating from brick and mortar now.
And SBUX did all this despite what amounts to a crippling shutdown in China. Once those stores reopen, it’s going to blow Big Tech’s socks off.