PayPal’s stock falls as earnings beat, but a margin metric misses

PayPal Holdings Inc. edged above expectations with its quarterly revenue and earnings outlook Wednesday, though the company fell short of a margin metric and disappointed Wall Street with its take rate.

Shares of PayPal

fell 7% in after-hours trading after the payment-technology company reported an adjusted operating margin of 21.4% for the second quarter, below the 22% outlook that the company had given previously.

In its investor deck, the company attributed the shortfall to its credit portfolio, where PayPal generated less revenue than it had anticipated and increased its loss provisions.

“There’s no other items that really contributed to that miss,” Acting Chief Financial Officer Gabrielle Rabinovitch said on the earnings call, noting that PayPal specifically saw pressure related to business loans.

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Analysts also flagged concerns about PayPal’s transaction take rate, which came in at 1.74%, while consensus expectations were for about 1.9%.

PayPal’s revenue for the second quarter increased to $7.29 billion from $6.81 billion, whereas analysts were modeling $7.27 billion. But Wolfe Research analyst Darrin Peller noted that while revenue was up 7%, gross profit increased only 1%.

“We believe investor focus will remain on gross-profit growth dynamics given the mismatch [between] revenue and gross-profit growth,” he wrote in a note to clients.

Rabinovitch said on the earnings call that PayPal expects continued pressure on transaction-margin performance in the third quarter before conditions improve in the fourth quarter. Over the long haul, she anticipates that PayPal’s transaction margins “will certainly be benefited” by factors such as accelerations in branded checkout and e-commerce growth, improved cross-border trends, and new value-added services.

The payments company reported second-quarter net income of $1.03 billion, or 92 cents a share, whereas it recorded a net loss of $341 million, or 29 cents a share, in the year-earlier period. On an adjusted basis, PayPal earned $1.16 a share, up from 93 cents a share a year prior, while the FactSet consensus was for $1.15 a share.

PayPal logged $376.5 billion in total payment volume for the period, while analysts had been expecting $368.9 billion.

Chief Executive Dan Schulman told MarketWatch that PayPal was seeing encouraging spending trends throughout the business and in the industry, as e-commerce growth picks up, discretionary purchasing improves and consumers start to rebalance their preferences once again after dramatically weighting their dollars more toward travel and services when the economy initially reopened.

A better balance of spending on goods versus services helps drives e-commerce growth, and “any uptick in e-commerce is going to accelerate our growth as well,” Schulman said.

Amid concerns from some corners of Wall Street about Apple Pay’s advancement, Schulman was confident in the state of PayPal’s branded checkout business.

“In our view we would expect that our branded checkout would be at or above the growth of e-commerce levels going forward,” he said.

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PayPal still expects to drive at least 100 basis points of operating-margin expansion for the full year, and it also continues to anticipate about $4.95 in adjusted EPS for 2023. PayPal expects second-half revenue to at least match its first-quarter revenue total.

For the third quarter, PayPal expects $1.22 to $1.24 in adjusted earnings per share, along with revenue of about $7.4 billion. The FactSet consensus was for $1.21 in adjusted EPS and $7.3 billion in revenue.

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