PayPal (NASDAQ:PYPL) shares fell on Tuesday despite the payment company delivering better-than-expected Q1 results and raising the full-year profit forecast.
Analysts were mostly cautious on PayPal heading into the earnings release due to a pull-forward effect as consumers were forced to depend more on online transactions during the Covid-19 era.
“As the lockdowns subsided, people went back to in-person spending. Some people, believe it or not, even went back to cash,” said Dominick Gabriele, an executive director and senior analyst at Oppenheimer & Co.
Still, PayPal managed to deliver solid Q1 numbers and raise a part of its full-year forecast to help calm investor fears about slowing growth.
Based on Monday’s closing price, PayPal shares are up 6% year-to-date (YTD).
How PayPal Did in Q1
PayPal said its revenue jumped by 8.6% year-over-year to $7.04 billion with the U.S. region driving the outperformance. While international revenue rose 2.9% to $2.89 billion, PayPal generated $4.15 billion from the U.S., which represents a 13% YoY growth.
“PayPal had a very good start to 2023 and delivered stronger than expected performance in the first quarter. We’re working hard to continually improve our already popular checkout and digital wallet experiences, and it is beginning to pay off,” President and CEO Dan Schulman said in a press release.
Total payment volume jumped almost 10% YoY to $354.51 billion to top the $349.54 billion consensus. Payment transactions increased by 13% to $5.84 billion while the company’s transaction revenue was up 6.1% to $6.36 billion.
Despite a difficult macroeconomic environment, PayPal managed to attract more customers with the number of active accounts rising to 433 million, however, below the 437.6 million that analysts were expecting.
On the bottom line, the adjusted EPS came in at $1.17, ahead of the $0.88 that was reported for the same period last year. Analysts were looking for $1.10, according to Bloomberg.
PayPal said its full-year share repurchases are expected to reach about $4 billion.
On the guidance front, PayPal said it expects its Q2 revenue will grow 6.5-7% on a spot basis and 7.5-8% on an FX-neutral basis. For the former, analysts were looking for a jump of 7%.
The payments company guided for a 24-26% increase in Q2 adjusted earnings per share to $1.15-1.17, slightly below the consensus of $1.17.
PayPal is growing more positive about its full-year outlook, hence the raised profit forecast. On the majority of stock trading platforms, PYPL remains a very popularly traded stock. CEO Schulman said the company is “confident in our momentum,” thus PayPal said it now expects adjusted EPS to grow 20% to about $4.95, up from the prior forecast of $4.87. The Street was at $4.88.
Despite the fact that the adjusted operating margin rose 200 basis points YoY to 23% in Q1 2023, the company still slashed its outlook for this closely-watched financial metric. PayPal said its adjusted operating margin is expected to increase by 100 bps in 2023, lowering its prior forecast for +125 bps.
“We are encouraged by our start to the year, and at the same time, mindful that the environment remains dynamic,” Gabrielle Rabinovitch, Senior Vice President, Corporate Finance and Investor Relations at PayPal said on the earnings call.
The margin growth expectations were lowered due to the soft growth of PayPal’s unbranded revenues. On a more positive side, the company continues to benefit from the broader e-commerce recovery.
“A lot of investors and PayPal themselves thought that the e-commerce growth was going to continue to grow at really significant levels,” added Gabriele.
However, not all analysts are fully on board with PayPal’s focus on e-commerce. Morningstar analyst Brett Horn sees a positive and a negative to this fact.
“The positive, obviously, is that it’s a high growth area and that benefits them over time. The negative is that that’s where a lot of the fintech innovation is centered around and a lot of the investment is going after that space because it is the highest growth space,” the analyst said.
Investors are also aware that the company is in the midst of a management transition after current CEO Schulman said earlier this year he will leave at the end of 2023. While the payments business continues to make progress with new initiatives, as well as with its artificial intelligence (AI) push, the lowered margin outlook is likely to underwhelm the Street.
“We expect AI will enable us to meaningfully lower our costs for years to come,” Schulman said.
Summary
PayPal shares moved lower on Tuesday as the company’s Q1 beat and raised EPS forecast was overshadowed by lowered margin growth expectations. While Q1 numbers were better than feared for many investors, the PayPal stock is likely to stay in the penalty box as long as there isn’t a higher level of investor confidence in the new management’s ability to execute on its long-term targets.
Shane Neagle is the EIC of The Tokenist. Check out The Tokenist’s free newsletter, Five Minute Finance, for weekly analysis of the biggest trends in finance and technology.
