PayPal Holdings, Inc. (PYPL) Inflated Net New Active Accounts Metric Guidance and Hid the Company’s Declining Levels of Engagement
A shareholder filed a class action on behalf of all persons and entities that purchased or otherwise acquired PayPal Holdings, Inc. (NASDAQ: PYPL) stock between February 3, 2021 and February 1, 2022, for violations of the Securities Exchange Act of 1934. PayPal operates one of the best-known digital payment platforms, enabling both merchants and customers to make digital and mobile payments worldwide.
According to the complaint, throughout the class period, PayPal touted the massive growth in its Net New Active Accounts (NNAs) and instructed investors to value the high growth in this metric as one of the most important indicators of how the Company was performing. That’s because in theory, the more accounts on the platform, the more opportunity there will be to earn transaction fees from the ever-increasing number of accounts. In order to increase the NNA metric, PayPal offered cash marketing incentives to customers for new account openings. In 2021, the Company offered ten dollars to customers who opened new accounts on the platform.
However, the Company failed to disclose that many of the additional users acquired through its cash account creation incentive campaigns were illusory, because those incentive campaigns were easily susceptible to fraud. Specifically, PayPal failed to disclose that its aggressive cash incentive campaigns significantly increased PayPal’s susceptibility to bot farms that were able to systematically take advantage of PayPal’s $10.00 account opening by creating millions of illegitimate accounts, which ultimately generated no future revenue for the Company.
In addition, investors were unaware of the lengths the Company was going to keep inactive customers and fake bot accounts on the platform to prevent churn and inflate its NNA guidance, which would have provided a more realistic view of the true demand for the Company’s platform.
The truth was disclosed on February 1, 2022, when PayPal reported disappointing fourth quarter and full year 2021 results. Specifically, PayPal reported that its NNAs were only 49 million for 2021, less than the guidance of 50 million it initially provided in February 2021. The Company admitted that “in connection with the increased use of cash incentive campaigns throughout 2021, [it] identified 4.5 million accounts that “it” believes(s) were illegitimately created,” and that as a result the Company changed course on some of its customer acquisition strategies including incentive-led campaigns in the fourth quarter. Further, because the Company was evolving its customer acquisition and engagement strategy, PayPal now expects only 15-20 million net new customer accounts for 2022 and that the Company “no longer believe(s) that the 750 million medium-term account aspiration [it] set last year, is appropriate.”
Further, the Company also admitted that in 2021 it pursued a strategy to retain those customers mostly likely to churn. The Company finally disclosed that “[W]e also leaned into incentivized customer acquisition tactics to a much greater extent than we ever have in our history” admitting that while “these programs are very successful in generating account creation, these customers have lower engagement and a higher propensity to churn, and have not met our required level of return. This dynamic compounds over time as it requires increasing investment simply to keep minimally-engaged users on our platform.” Therefore, going forward, the Company will focus on driving engagement of active customers rather than trying to grow its NNAs. On this news, PayPal’s stock price fell $43.23, or 25% in one-day, to close at $132.57 per share on February 2, 2022 – representing a $62 billion drop in market capitalization.
Next Steps: If you acquired shares of PayPal Holdings, Inc. stock between February 3, 2021 and February 1, 2022, you have until December 4, 2022, to ask the court to appoint you lead plaintiff for the class. A lead plaintiff is a representative party acting on behalf of other class members in directing the litigation. You do not have to participate in the case to be eligible for a recovery.
All representation is on a contingency fee basis. Shareholders pay no fees or expenses.