Paypal Boosts Its Profit Outlook, but Its Stock Falls After Earnings

PayPal Holdings Inc. has been focused on the theme of “profitable growth” throughout 2024, and its third-quarter results reflect this strategy as the company reported steady growth in one of its key profit metrics. PayPal achieved an 8% increase in transaction-margin dollars during the third quarter, matching its performance from the second quarter. This metric is crucial because it measures how profitable the company’s transaction volume is. Excluding interest on customer balances, PayPal's growth on this measure was 6%.

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One of the highlights for PayPal in the third quarter was that it exceeded Wall Street's expectations for transaction-margin growth. Jefferies analyst Trevor Williams noted that analysts had been anticipating a more modest 4% growth, making the 6% figure a significant positive surprise. Building on this momentum, PayPal raised its full-year forecast for transaction-margin dollars, now expecting mid-single-digit growth compared to its earlier projection of low- to mid-single-digit growth. However, Williams cautioned that even if PayPal maintains 6% growth, the company’s outlook for the fourth quarter implies a deceleration to about 3.5% growth in transaction-margin dollars.

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Despite the positive developments, shares of PayPal fell more than 5% in Wednesday’s morning trading. Investors may have been concerned about the company's fourth-quarter revenue outlook, which projected low-single-digit growth, a figure that fell short of the FactSet consensus of 5.4%. PayPal explained in its earnings presentation that its conservative revenue projection for the fourth quarter stems from its focus on prioritizing “profitable growth.” The company has been deliberately shifting toward transaction volume that yields better profit margins, rather than simply chasing higher volumes.

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Mizuho analyst Dan Dolev acknowledged that PayPal’s revenue forecast might be putting pressure on the stock, but he also emphasized that the company’s transaction-margin dollar growth is its most critical metric. He pointed out that this measure continues to perform well, reinforcing the idea that PayPal’s profitability is trending in the right direction. Similarly, Baird analyst Colin Sebastian highlighted that while PayPal’s overall revenue growth might be slowing, the company is improving the quality of its revenues. This is evident in the steady growth of its core branded checkout volumes, which is helping to offset the deceleration in non-core processing. Additionally, PayPal continues to see solid expansion in transaction margins.

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For the third quarter, PayPal generated $7.85 billion in revenue, reflecting a 6% year-over-year increase. However, this figure slightly missed analysts' expectations, as they had been forecasting $7.88 billion in revenue. On the earnings front, PayPal delivered stronger results, beating expectations with adjusted earnings per share of $1.20, a 22% increase from the previous year. Analysts polled by FactSet had been expecting $1.07 per share. On a GAAP basis, PayPal reported net income of $1.01 billion, or 99 cents per share, compared to $1.02 billion, or 93 cents per share, in the same quarter a year earlier.

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In addition to the positive earnings surprise, PayPal also raised its full-year guidance for adjusted earnings per share. The company now expects earnings to grow at a rate in the high teens, up from its previous projection of low- to mid-teen growth. This upgraded outlook reflects PayPal's confidence in its ability to maintain profitability in the face of a competitive payments landscape.

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However, the company did offer a more cautious outlook for the fourth quarter, projecting a low- to mid-single-digit decline in adjusted earnings per share. PayPal explained that this expected decline is partly due to its decision to increase marketing spending. The company plans to invest more heavily in marketing initiatives to boost awareness of its new products, which is a critical part of its long-term growth strategy.

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Despite the mixed reactions to its latest earnings report, PayPal has performed well in the stock market this year. As of Monday's close, PayPal's shares were up 36% year-to-date, including a 7% rise in the month leading up to the third-quarter earnings announcement.

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In summary, PayPal's third-quarter results reflect the company’s ongoing focus on profitable growth. While the company exceeded expectations on key profit metrics, its more cautious revenue and earnings outlook for the fourth quarter may have tempered investor enthusiasm. Nonetheless, PayPal’s efforts to improve its transaction margins and prioritize higher-quality revenue streams suggest that the company is positioning itself for long-term success, even if short-term growth appears to be slowing. The decision to increase marketing spending in the coming quarter signals PayPal’s commitment to driving future growth, particularly through the introduction of new products and services.

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