Riding high on the digital payment wave, PayPal Holdings Inc. (PYPL, Financial) just dropped a financial bombshell that has got Wall Street buzzing.
Clocking in at $7.4 billion in revenue, an 8% spike from last year, the payments company is smashing expectations and showing the financial world it is not just playing the game—it is setting the rules.
With a strategy that is as innovative as it is effective, PayPal is leveraging consumer loyalty like never before, converting cashback into comeback and rewards into returns.
PayPal's winning streak: Strong third-quarter results
PayPal reported a robust performance in the third quarter, exceeding Wall Street's revenue estimates and reaching $7.4 billion. This marked impressive 8% year-over-year growth. The company demonstrated its ability to generate substantial revenue, reflecting positively on its financial health and market position. Third-quarter adjusted earnings per share came in at $1.30, surpassing the consensus estimate of $1.23. This growth in earnings is significant, and it has been on an upward trajectory, rising from $1.16 in the second quarter and significantly higher than the same period in 2022.
Strategically, PayPal has been actively working on innovative strategies to enhance consumer engagement. Products like the PayPal Cashback Mastercard (MA, Financial), offering 3% cashback on PayPal purchases, and PayPal Rewards have successfully increased customer activity and loyalty. Over 25 million consumers have used PayPal Rewards in the past 12 months, with more than $200 million returned to customers through cashback and savings. Therefore, these initiatives are aimed at creating more value for consumers and can drive higher revenue.
Source: PayPal earnings presentation
Additionally, the company is committed to providing comprehensive solutions for small businesses. The introduction of PayPal Complete Payments, which allows small businesses to sell globally and accept various payment methods, including PayPal, Venmo and PayPal Pay Later, aims to help these businesses improve their transaction processes and efficiency. The implementation of package tracking services has already shown positive results, including an 80% decrease in item not received disputes, 40% higher dispute wins and 65% faster fund release. Therefore, its focus on serving small businesses can contribute to value growth.
Further, PayPal's ambition to offer value-added services to large enterprises, such as payouts, fraud management, charge-back automation and foreign exchange services, presents an opportunity for additional margin revenue. These services not only address specific customer pain points, but also potentially improve its profitability.
Looking forward, while PayPal's fourth-quarter guidance for net revenue and non-GAAP earnings per diluted share ($1.36) falls slightly short of the average analyst estimate ($1.40), it is crucial to recognize these projections still indicate growth. The company expects net revenues to grow by approximately 6% to 7% on a spot basis and non-GAAP earnings per diluted share are projected to grow by around 10%. This guidance provides investors with a sense of what to expect in the near term. Also, the guidance for full-year 2023 is optimistic.
PayPal anticipates significant growth in GAAP and non-GAAP earnings per diluted share compared to the previous year. Non-GAAP earnings per diluted share are projected to grow by approximately 21% to about $4.98, compared to $4.13 in 2022. The guidance suggests strong confidence in the company's long-term profitability and performance.
Lastly, PayPal's plan to allocate approximately $5 billion (nearly 9% of the current market cap) to share repurchases is a capital allocation strategy aimed at reducing the number of shares outstanding. A decrease in the number of shares can increase the value of each share, benefiting existing shareholders and potentially impacting the stock price positively.
Navigating global growth with a strategic edge
During the third quarter of 2023, PayPal revealed that its total payment volume soared to $388 billion, a rise of 15% on a nominal basis and 13% after adjusting for currency fluctuations, showcasing a solid upswing in transaction activity. This indicates PayPal's consistent momentum in broadening its footprint and amplifying the quantum of payments it processes.
Moreover, the peer-to-peer segment of the business, which includes platforms such as PayPal, Venmo and Xoom, advanced by 4% to hit $97 billion. This represents a quarter of the company's overall TPV. While this uptick is constructive, it remains relatively subdued compared to the aggregate growth of TPV, hinting at potential market competition challenges or a matured state of peer-to-peer payment services.
Source: PayPal earnings presentation
Delving deeper, the transaction count per active user has climbed to 56.6, marking a 13% increase, largely fueled by the transaction uptick from Braintree. The rise in TPA underscores a pattern of heightened engagement and usage, particularly stemming from Braintree's contributions.
The quarter closed with PayPal boasting 428 million active accounts, of which 35 million are merchant accounts. Thus, there was a sequential slight drop of 0.6% in active users, equating to a reduction of roughly 2.8 million users. This was attributable to the departure of low-engagement users and a tactical pivot toward nurturing deeper engagement among the current user demographic. However, the strategic decision to focus on TPA, despite the less active accounts, is a move to refine the user base for enhanced involvement and profitability.
Source: Earnings Presentation
State of competition
Strategically, to counter the growing competition, PayPal embarked on a "leaner" strategy, emphasizing the need to streamline operations and focus on profitable growth priorities. The new CEO, Alex Chriss, highlighted the company's intention to align its resources with its most profitable growth areas and reduce its cost base.
The positive market (7% price gain) response can be attributed to several factors. First, the street sees the leaner strategy as a promising shift in the company's focus. PayPal's acknowledgment of its high cost base suggests a focus on improving operational efficiency and profitability.
In the short term, the positive market response to PayPal's strategy will likely drive the stock price higher. However, the long-term implications will depend on the company's strategy execution. If it successfully delivers on its promises and improves its profitability, it can sustain the upward momentum in its stock price.
At the top of all adversities, PayPal received a subpoena from the Securities and Exchange Commission concerning its stablecoin, PYUSD, on Nov. 1. The subpoena requests the production of documents. The company introduced the PYUSD stablecoin in August, backed by U.S. dollar deposits, short-term U.S. Treasuries and similar cash equivalents.
The SEC's subpoena intensified regulatory uncertainty for PayPal. As a result, its stock price could experience downward pressure (similar to Coinbase (COIN, Financial)) as investors react to the uncertainty surrounding the inquiry and its potential to disrupt PayPal's crypto initiative.
Source: Bloomberg
On the other hand, the competitive challenge posed by Elon Musk's X, which aims to become a comprehensive financial hub, handles various aspects of users' financial lives. Musk's vision includes offering high-yield money market accounts, debit cards, checks and real-time money transfers, essentially creating a platform that could render traditional banking services obsolete.
Musk's ambitious plan represents a formidable challenge for PayPal. It underscores the rapid evolution of the digital payments and financial services landscape. X's goal of offering a one-stop solution for financial needs, including money management, securities and payments, could attract a broad user base and potentially erode PayPal's market share.
Notably, Musk's reference to the original X.com vision, which later became part of PayPal, highlights the historical competition between Musk's vision and PayPal. He is determined to realize the full potential of his vision for a financial hub, even if it means competing directly with the platform that evolved from X.com. The implications for the stock price are more nuanced in the medium to long term. While the immediate impact might not be significant, the competitive challenge from X could boost uncertainty and serve as a potential headwind.
Recently, an antitrust lawsuit was filed against PayPal, alleging its anti-steering rules stifle competition by preventing merchants from offering discounts for alternative payment methods. The antitrust lawsuit underscores the level of competition and regulatory challenges that companies in the digital payments industry face.
The specific allegations relate to anti-steering rules that prohibit merchants from offering discounts for lower-cost payment methods. This could lead to consumers paying more for their purchases when using PayPal or Venmo. Overall, the implications for PayPal's stock price in the short to medium term are negative. If PayPal is found to violate antitrust regulations, it may face fines or be required to alter its business practices.
Navigating between upswing potential and valuation realities
PayPal's stock has recently shown a bullish upswing of 7%, marked by a hammer candlestick pattern and a bullish divergence in the relative strength index following its earnings report. This suggests the emergence of a support level at $51.80. However, the stock may face a potential downtrend in the future, driven by negative developments such as an economic downturn or increased competition, which could push the price down to $37.15, a long-term support level.
On a positive note, the price could consolidate sideways for a few weeks before embarking on an uptrend towards $63.80 to interact with the 200-day exponential moving average. In order to enter a bull run, the stock needs to break the $75.80 resistance level. For the mid-term, a target for partial profit booking could be set at the $90.65 resistance level.
Source: Tradingview.com
Takeaway
In summary, PayPal's third-quarter performance signals a company on the rise, with solid revenue growth and strategic maneuvers resonating with consumers and investors alike. The company's ability to outperform estimates, innovative product offerings and commitment to small business and international expansion underscores its robust position in the competitive financial technology landscape.
Despite facing potential regulatory challenges and increased competition, PayPal's forward-looking strategies and proactive management of market dynamics suggest a resilient outlook. With a reasonable approach to capital allocation through share repurchases and an emphasis on operational efficiency, PayPal is navigating its growth trajectory with confidence, prepared to capitalize on both current momentum and future opportunities.
