- PayPal stock was down 7% Tuesday after Q3 earnings.
- The company beat earnings estimates, but fell short of revenue projections.
- Is PayPal stock a buy?
The leading payment provider posted Q3 earnings that beat estimates, while revenue fell short.
PayPal Holdings (NASDAQ:PYPL) stock was trending lower on Tuesday after the online payment company reported mixed third quarter results.
PayPal saw net revenue rise 6% in the third quarter to $7.8 billion, which fell short of the approximately $7.9 billion that analysts had expected.
Net income fell 1% year-over-year to $1.01 billion, but earnings per share rose 6% to 99 cents per share. On an adjusted basis, EPS jumped 22% to $1.20 per share, beating estimates of $1.07 per share.
The mixed results, combined with a lukewarm outlook, sparked a selloff Tuesday, as the stock price dropped some 7% Tuesday morning to around $78 per share.
Bounce Back Year
It has now been one full year since new CEO Alex Chriss took the reins and the company has generally been moving in the right direction. The stock is up about 27% year-to-date in what has been a bounce-back year, but it’s still not where it was pre-Covid.
If you take out the ridiculous inflated run it had in 2020 and 2021, where PayPal stock soared to over $300 per share, it was generally around $100 to $110 per share, so it is still climbing its way back.
To broadly summarize Chriss’s turnaround plan, he is looking to streamline expenses and focus on core strengths, payments, and maximize profits in key profit centers.
The initiative has generally been successful thus far, as the total payment volume on PayPal increased 9% to $423 billion and 8% on Venmo to $75 billion. The number of active accounts rose 1% to 432 million while monthly active accounts climbed 2% to 223 million. The number of payment transactions increased 6% to 6.6 billion.
In terms of how that has translated into profits, transaction margin dollars increased 8% to $3.7 billion in Q3 while operating income jumped 19% to $1.4 billion. Further, operating margin rose 198 basis points to 17.7% year-over-year. However, the take rate, a key metric that shows how much PayPal “takes” from a transaction, fell to 1.86%, from 1.91% in the same quarter a year ago.
“We are making solid progress in our transformation as we bring new innovations to market, forge important partnerships with leading commerce players, and drive awareness and engagement through new marketing campaigns,” Chriss said. “We are raising our full year non-GAAP guidance and are pleased with the strength we are seeing across the business. We’ve built a solid foundation in this last year that will serve us in the years to come.”
Outlook Slightly Below Expectations
While PayPal raised its guidance for fiscal 2024 for some metrics, the outlook was generally below what analysts had anticipated. This, along with the slight revenue miss, likely caused PayPal stock to drop Tuesday.
For Q4, PayPal is expecting low single digit revenue growth, which is slightly below analysts’ projections of mid-single digits. Also, the adjusted EPS guidance calls for low- to mid-single-digit decrease to $1.07-$1.11 per share, due to elevated marketing spend to support key initiatives and new products. But this is slightly better than previous guidance calling for a mid-single digit decrease.
For the full fiscal year, PayPal raised the guidance for transaction margin to mid-single digit growth, up from low- to mid-single digit growth, and raised the adjusted EPS to high teens growth, up from low- to mid-teens growth.
An area that analysts say could impact revenue in the short term is Braintree, which provides payment services for corporations. One of Chriss’s initiatives was to raise prices for Braintree to reflect the new innovations and value-added services it has rolled out.
“We’re making solid progress on our initiative to price our services in a way that reflects the current value we bring to our merchants,” Chriss said on the Q3 earnings call.
“This is now the second consecutive quarter in more than two years that Braintree is meaningfully contributing to transaction margin dollar growth. We’re having very constructive conversations with our merchants focused on ways we can enable strategic growth opportunities that drive long-term upside for both of us.”
Analysts say this could result in a near-term drop in revenue.
Overall, Tuesday’s selloff is not too concerning, and the company still seems headed in the right direction. The valuation has crept up a bit, so the selloff could bring it closer to a better buy zone. However, be cautious as it may see some more near-term volatility before moving into a better buy zone early next year, pending Q4 results and economic conditions.