PayPal's new CEO and President will be Alex Chriss, who currently holds a senior position at financial software company Intuit. Chriss has "unanimous" Board support and will start on 27 September 2023. Current CEO, Dan Schulman announced plans to retire earlier this year and will stay on the Board until next May.
The shares were unmoved in after-hours trading.
Second quarter trading details (3 August 2023)
PayPal's second-quarter Total Payment Volumes climbed 11% to $376.5bn ignoring exchange rate movements. Revenues of $7.3bn saw slower growth of 8% reflecting a continued fall in the total share of transactions PayPal can claim as revenue.
Underlying operating profit expanded faster than revenue, up 20% to $1.6bn. That's a margin of 21.4%, down from 22.7% in the previous quarter. Lower margins on payment processing are one factor behind this trend, driven by the increasing share of unbranded transactions.
Free cash outflow was $0.4bn. This included a $1.2bn impact of buy- now-pay-later loans expected to reverse following the proposed sale of a loan portfolio. Net debt stood at $0.6bn, down from a net cash position of $0.5bn.
Third-quarter revenue is expected to grow by around 8%. Full-year guidance on underlying operating margins and earnings per share was re-iterated. Share buybacks for the year are now expected to total around $5bn, up from a previous steer of $4bn.
PayPal's new CEO announcement hasn't rocked the boat. We think that's largely because Alex Chriss has experience in the right areas which match up with PayPal's ambitions for growth, especially in so-called unbranded processing transactions (more on that later).
Looking under the hood of the payment giant, total payment volumes being made using PayPal's technology have proved to be resilient in the face of an ongoing cost-of-living crisis. Meanwhile, outgoing CEO Dan Schulman has expressed confidence over a rebound in-e-commerce spending as inflation cools. That could help growth to accelerate but we would still urge some caution.
PayPal's strongest volume growth is currently coming from its unbranded business which allows businesses to put their own name to the payment solution. It also opens the door to provide retailers with additional services such as the buy now pay later offering, which we think may see further traction as consumers grapple with a cost-of-living crisis and burn through their savings at a rate of knots. There are some concerns about the lower profitability of payments in the unbranded side of the business and PayPal tells us there's a plan to improve this, but the continuing slide in transaction margins suggest that this may be proving harder than first thought.
An aggressive cost-cutting program introduced in the middle of last year initially helped operating profits to recover, but there's only so long this can offset the lower profitability of PayPal's changing business mix, and underlying operating margins have begun to slip again.
PayPal's a beneficiary, and indeed an architect, of an ongoing shift to digital payments. Yet, despite the scale, there's still a lot of market share to go for. Last we heard, consumer penetration's below 50% in its core markets, and competition is increasing.
A robust balance sheet, and free cash flow of over $5bn last year, gives firepower to make acquisitions to reach new customers or distribute cash to shareholders. Remember, no returns are ever guaranteed.
Meanwhile, whilst we see the foray into the credit market as an exciting growth opportunity, it has started to put some pressure on cash flow. We're supportive of efforts to make this business more scalable, but will be something to watch.
Despite a recent recovery the valuation remains well below the ten-year average, reflecting the slowdown in growth and pressure on the bottom line.
PayPal shares present an opportunity to gain exposure in the electronic payment arena, which we believe is still subject to longer-term structural growth drivers. And PayPal is a name consumers and retailers trust, being one of the most widely accepted digital wallet solutions there is. But there is increasing competition, and there could be further downward pressure if there are further disappointments on margin recovery. The challenges facing the new CEO aren't insurmountable, but they are real.
PayPal key facts
- Forward price/earnings ratio (next 12 months): 11.8
- Average forward price/earnings ratio since listing (2015): 30.6
- Prospective dividend yield (next 12 months): 0%
- Average prospective dividend yield: 0%
All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
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