'If you can look beyond the eBay transition...you can see a very consistent and strong story about the core underlying business,' CEO says

$PayPal(PYPL.US)$ largely matched expectations for its holiday quarter but shares  plunged late Tuesday after the company delivered an earnings forecast that came up shy of expectations.

Shares were off nearly 18% in after-hours trading Tuesday as Chief Financial Officer John Rainey pointed to several factors contributing to a "more cautious" forecast. The company is feeling a sting from inflationary pressures, weaker consumer sentiment, and the supply crunch, and it's seen a more pronounced impact on spending among lower-income customers.

For the first half of the year, the company also predicts continued headwinds from eBay Inc. (EBAY), which has been migrating volume away from PayPal (PYPL) as part of its own payments evolution.

Looking to the first quarter, PayPal anticipates revenue growth of about 6%, or 14% when excluding impacts from eBay. The FactSet consensus calls for $6.76 billion in quarterly sales, which would be up about 12% from the $6.03 billion that PayPal reported a year earlier.

The company also projects first-quarter adjusted earnings per share of about 87 cents, while the FactSet consensus is for $1.16.

Additionally, PayPal is changing its strategy when it comes to user growth and retention, a move that will reduce its outlook for growth in net-new-active accounts as the company shifts its focus toward "higher-value" accounts that are more engaged with the PayPal platform. The company plans to start providing metrics on average revenue per user (ARPU) to show how user trends are impacting the financials.

The company previously ran "incentive-based programs" meant to get lapsed users to "reengage" with PayPal's platform, but these largely failed to drive sustained usage, Chief Executive Dan Schulman said on the earnings call.

"So our view is spending money on lower-value [net-new active users] that are not engaged in the base becomes an increasingly expensive proposition over time and does nothing for our revenue growth," he said.

While the company previously gave a forecast for 750 million active accounts in the medium term, that outlook is no longer "appropriate," Rainey said. For 2022, the company expects it will add 15 million to 20 million active accounts; the FactSet consensus implied an increase of more than 50 million.

"To be very clear, this is a choice on our part," he continued. "We could increase our spend and accelerate our net-new-active trajectory; however, we believe there are better ways to achieve our financial results."

Wolfe Research analyst Darrin Peller wrote that while he "saw some downside risk to guidance" heading into the report, "the magnitude was materially more pronounced" as the account, revenue, and earnings guidance fell below already-lowered expectations.

"We believe part of this can be attributed to a greater pull-forward than expected in customer adds over the last two years and a strategic shift towards focus on ARPU over adding NNAs [net new active accounts], but think investors may be more concerned with competitive dynamics potentially being more severe and the company's longer-term growth targets," he wrote.

Mizuho analyst Dan Dolev said that the report constituted "a return to earth" after PayPal's strong surge earlier in the pandemic, but he also wondered if the company's disappointing numbers "[concealed] a hidden bottom."

"We see notable positives," he wrote, including that growth in total payment volume, when excluding eBay and peer-to-peer volume, accelerated in the fourth quarter. PayPal's count of transactions per account also "accelerated dramatically."

Executives at PayPal remained upbeat about the long-term potential of the business.

"If you can look beyond the eBay transition, which we have five more months to go through... and you look past the lapping of the very high quarters of growth that we had last year, you can see a very consistent and strong story about the core underlying business," Schulman told MarketWatch.

The payment-technology company reported fourth-quarter net income of $801 million, or 68 cents a share, down from $1.56 billion, or $1.32 a share, a year prior. On an adjusted basis, PayPal earned $1.11 a share, up from $1.08 a share a year earlier, while the FactSet consensus was for $1.12 a share.

PayPal's revenue came in at $6.9 billion for the fourth quarter, matching the FactSet consensus. A year prior, PayPal logged quarterly revenue of $6.1 billion.

The latest quarterly revenue performance brought PayPal's annual total to $25.4 billion for 2021, up from $21.5 billion a year earlier.

The company saw $340 billion in fourth-quarter total payment volume, slightly below the FactSet consensus, which was for $345 billion. The TPV metric captures the dollar value of transactions running through PayPal's platform.

PayPal had 426 million active accounts as of the end of 2021.

Schulman told MarketWatch that PayPal was seeing better-than-expected traction for its redesigned app, which focuses on a broader set of financial-services tools. The revamped app has helped spur new interest in PayPal's crypto-buying feature and driven a sharp increase in the number of users who visit a merchant's site based on seeing a deal offer on PayPal's shopping hub.

For the full year, the company anticipates that total payment volume will reach $1.5 trillion and that revenue will exceed $29 billion. Analysts tracked by FactSet were modeling $1.53 trillion in TPV and just shy of $30 billion in revenue.

Rainey noted that during PayPal's prior earnings call, the company pinpointed projected 2022 revenue growth at about 18%, but the company's current outlook calls for 15% to 17% growth.

"We have an incredible business, but we are not immune to the vagaries of the economy," he wrote. If challenges like inflation and supply pressures ease, growth could come at the high end of the range, but if they worsen, growth could fall at the low end, he added.

PayPal also anticipates $4.60 a share to $4.75 a share in adjusted earnings for 2022. The FactSet consensus is for $5.21 in adjusted earnings.

PayPal expects that its revenue growth will accelerate as the year goes on. Schulman anticipates that the "lapping noises" will go away in the third quarter and that PayPal can finish the year with revenue growth of at least 20%.