PayPal Holdings Inc. (NASDAQ:PYPL)

The period under review demonstrates a fluctuating financial performance as measured by economic profit. Net operating profit after taxes (NOPAT) initially increased before declining significantly, while the cost of capital decreased modestly over the same timeframe. Invested capital exhibited a consistent upward trend, though the rate of increase slowed in the most recent periods. Consequently, economic profit remained negative throughout the analyzed years, with the magnitude of the loss increasing in later years.

NOPAT Trend

NOPAT experienced growth from 2018 to 2020, increasing from US$1,833 million to US$4,527 million. However, a substantial decline followed, with NOPAT falling to US$3,793 million in 2021 and further decreasing to US$1,747 million in 2022. This suggests a weakening in operational profitability in the latter part of the period.

Cost of Capital Trend

The cost of capital showed a slight decreasing trend, moving from 17.66% in 2018 to 16.40% in 2022. While this indicates a reduced cost of funding, the decrease was not substantial enough to offset the declines in NOPAT and the increases in invested capital.

Invested Capital Trend

Invested capital consistently increased throughout the period, rising from US$17,780 million in 2018 to US$31,496 million in 2022. The rate of growth slowed between 2021 and 2022, with a smaller incremental increase compared to prior years. This suggests continued investment in the business, but potentially diminishing returns.

Economic Profit Trend

Economic profit remained negative across all years examined. The initial loss of US$1,308 million in 2018 widened to US$1,732 million in 2019 and US$772 million in 2020. It then increased in magnitude again, reaching US$1,523 million in 2021 and culminating in a loss of US$3,419 million in 2022. This indicates that the company’s returns on invested capital were consistently below its cost of capital, and the gap widened considerably in the final year.

The combined effect of declining NOPAT, a modestly decreasing cost of capital, and increasing invested capital resulted in a worsening economic profit position over the analyzed period. The substantial increase in the economic loss in 2022 warrants further investigation into the underlying drivers of the reduced profitability and capital efficiency.

Net Income

The net income displayed an overall increasing trend from 2018 through 2020, rising from 2,057 million USD to a peak of 4,202 million USD. In 2021, the net income slightly decreased to 4,169 million USD but remained close to the previous year's high. However, in 2022, net income experienced a significant decline to 2,419 million USD, nearly reverting to the level recorded in 2019.

Net Operating Profit After Taxes (NOPAT)

NOPAT followed a similar pattern to net income, increasing steadily from 1,833 million USD in 2018 to reach a maximum of 4,527 million USD in 2020. In 2021, a notable decrease occurred, with NOPAT falling to 3,793 million USD. The downward trend continued more sharply in 2022, with NOPAT dropping to 1,747 million USD, marking the lowest figure within the period analyzed and significantly below the 2018 starting point.

Overall Observations

Both net income and NOPAT demonstrated strong growth leading up to 2020, indicating a period of robust profitability. However, the years following 2020 show a reversal with considerable declines in profitability metrics. The drop in 2022 is particularly pronounced, suggesting challenges or changes in operational performance affecting the company's ability to generate profit after taxes. This downward shift merits further investigation into contributing factors such as revenue changes, cost structures, or external economic conditions affecting the company.

Income tax expense (benefit)

The income tax expense exhibited notable fluctuations over the examined period. Starting at $319 million at the end of 2018, it increased substantially to $539 million in 2019 and further to $863 million in 2020. However, there was a significant reversal in 2021, with the tax expense shifting to a benefit of $70 million, indicating a tax credit or reduction in tax liabilities for that year. This benefit sharply reversed to a substantial expense of $947 million by the end of 2022, suggesting either a change in profitability or tax strategy that led to increased tax obligations.

Cash operating taxes

Cash operating taxes followed a broadly variable trend. Beginning at $475 million in 2018, these taxes rose to $796 million in 2019, indicating an increased cash tax outflow. The figure then declined to $728 million in 2020 and further decreased to $454 million in 2021. This downward trend was reversed in 2022 with a marked increase to $1,790 million, more than tripling the cash operating taxes compared to the previous year. This sharp increase in 2022 signals a significant rise in actual cash taxes paid, which may reflect changes in profitability, tax rates, or deferred tax payments being settled.

Overall analysis

The data illustrates considerable volatility in both reported income tax expense and cash taxes paid over these years. The discrepancy between income tax expense turning into a benefit in 2021 while cash operating taxes decreased suggests timing differences or tax planning effects. The pronounced spike in both income tax expense and cash taxes in 2022 implies a substantial change in the company's tax situation or profitability, warranting further investigation into underlying operational or tax law changes affecting this period.

The financial data indicate noteworthy trends in the company's capital structure and financing over the observed period from 2018 to 2022.

Total reported debt & leases

The company’s total reported debt and leases showed a significant increase throughout the period. Starting at $2,584 million in 2018, the debt nearly doubled by 2019 to $5,472 million. This upward trend continued sharply in 2020, reaching $9,725 million, with a slower but steady rise in 2021 at $9,810 million, and further increase to $11,555 million in 2022. This pattern suggests an expanding use of debt financing or lease obligations over the years.

Total PayPal stockholders’ equity

Stockholders' equity also increased overall but at a more moderate pace compared to debt. Beginning at $15,386 million in 2018, equity rose consistently each year, peaking at $21,727 million in 2021 before slightly declining to $20,274 million in 2022. This trend implies retention of earnings and possible capital infusions, though the 2022 dip may indicate distributions, losses, or other equity reductions in that year.

Invested capital

Invested capital showed a steady growth trend across the period. From $17,780 million in 2018, it increased annually, reaching $31,496 million by 2022. This steady increase reflects the company’s growing asset base financed by both debt and equity, with the notable acceleration seen from 2019 onwards.

In summary, the data reveal an overall expansion in the company’s financial base, with a more pronounced rise in leverage compared to equity. The increased debt levels might indicate strategic investments funded through borrowing, while the equity growth confirms continued shareholder value enhancement until 2021, followed by a slight equity contraction in 2022.

The economic spread ratio demonstrates a consistently negative trend over the observed five-year period. Initially negative at -7.36% in 2018, the ratio worsened to -10.86% by 2022. This indicates a widening gap between the company’s return on invested capital and its weighted average cost of capital.

Economic Spread Ratio Trend

The economic spread ratio exhibited a generally declining pattern. From 2018 to 2019, the ratio moved from -7.36% to -7.78%, representing a slight deterioration. A notable improvement occurred in 2020, with the ratio increasing to -2.55%, suggesting a temporary narrowing of the gap between returns and costs. However, this improvement was short-lived, as the ratio resumed its downward trajectory, reaching -4.86% in 2021 and further declining to -10.86% in 2022. This recent decline is the most substantial observed within the period.

Economic profit also consistently remained negative throughout the period, mirroring the trend in the economic spread ratio. While the absolute value of economic profit fluctuated, it never reached positive territory. The most significant negative economic profit occurred in 2022, at US$3,419 million, aligning with the most negative economic spread ratio for that year.

Invested Capital

Invested capital increased from US$17,780 million in 2018 to US$31,496 million in 2022. This growth in invested capital occurred alongside consistently negative economic profit and a worsening economic spread ratio, suggesting that increases in capital deployment did not translate into commensurate improvements in profitability relative to the cost of that capital.

The combination of a negative and declining economic spread ratio, coupled with consistently negative economic profit, suggests the company is generating returns below its cost of capital. The increasing invested capital without a corresponding improvement in the economic spread ratio raises concerns about the efficiency of capital allocation.

The economic profit margin exhibited a generally worsening trend over the five-year period. While fluctuations occurred, the metric consistently indicated negative economic profit, suggesting the company’s returns were insufficient to cover the cost of capital.

Economic Profit Margin Trend

In 2018, the economic profit margin stood at -8.46%. This deteriorated to -9.75% in 2019, representing the lowest point in the observed period. A notable improvement was seen in 2020, with the margin increasing to -3.60%, though remaining negative. This positive movement was short-lived, as the margin declined to -6.00% in 2021 and further to -12.42% in 2022, the most negative value observed.

The absolute value of the economic profit margin increased significantly in 2022, indicating a substantial decline in economic profitability relative to revenues. This suggests a widening gap between the company’s operating profits and its cost of capital during that year.

Relationship to Net Revenues

Net revenues demonstrated consistent growth throughout the period, increasing from US$15,451 million in 2018 to US$27,518 million in 2022. However, this revenue growth did not translate into improved economic profitability, as evidenced by the consistently negative and, ultimately, worsening economic profit margin. The increasing negative margin alongside rising revenues suggests that the cost of capital is growing at a faster rate than the profits generated from revenue growth, or that operational inefficiencies are impacting profitability.

The economic profit figures themselves mirrored the trend in the margin, with negative values throughout the period and a substantial increase in the magnitude of the loss in 2022. This reinforces the conclusion that the company’s financial performance, while showing revenue expansion, did not generate sufficient returns to satisfy investor expectations based on the cost of capital.