PayPal’s first-quarter revenue grew by 5% to $8.4bn ($8.0bn expected) ignoring exchange rates, lagging payment volume growth of 8% due to pricing actions and a shift in the product mix.
Underlying operating profit fell 5% to $1.5bn largely due to increased transaction expenses.
Underlying free cash flow grew 25% to $1.7bn, helped by the timing of receipts and payments. Net debt came in at $0.1bn compared $0.4bn net cash at year-end.
PayPal declared a dividend of $0.14 per share and repurchased $1.5bn of shares in the quarter.
Guidance for underlying earnings per share growth still ranges from slightly positive to a low-single digit decline. In the second quarter however, the decline is expected to reach around 9%, about 5 percentage points worse than consensus forecasts.
The shares fell 8.3% following the announcement.
Our view
PayPal shares have come under pressure after downbeat near-term profit guidance overshadowed an ambitious turnaround plan.
The new CEO has moved quickly to simplify and streamline the business, with a potential break-up on the table as speculation grows around a disposal of the Consumer Financial Services arm, its fastest-growing division, home to Venmo and Buy Now Pay Later.
Efforts are underway strip out $1.5bn of costs, lean into automation and redeploy capital towards growth.
The innovation focus is set to remain, but with a heightened emphasis on execution, something where incoming boss Enrique Lores can claim a strong track record. Beleaguered investors can be forgiven for feeling a sense of déjà vu and will be anxious to see clear signs of progress.
In the increasingly competitive space of digital payments, PayPal has been struggling to defend its market position and profit margins. It still has a massive footprint across both consumers and vendors, with plenty still to go for. But if it wants to kick-start growth again, it needs to keep upping the bar on the functionality it offers.
Efforts are underway to reinvigorate the all-important branded checkout business, and further investments are planned this year. Artificial Intelligence investments are not only targeting efficiency, but also customer engagement.
But, as with eCommerce, competition in the AI payment world is likely to be fierce. In the near term, these investments are set to dent margins, and it may take some time before the benefits arrive.
A robust balance sheet and strong free cash flows support the investment drive as well as substantial distributions to shareholders. There’s a modest dividend yield on offer, with a total of $6bn of buybacks slated for 2026. However, there can be no guarantee of future payouts, particularly if PayPal’s competitiveness slips further.
PayPal’s single-digit earnings multiple reflects its journey from payments pioneer to struggling incumbent. A spin-off of Venmo is a potential near-term catalyst to reviving sentiment in the company, but it’s improving performance in the core branded checkout business that we see as the key dial mover. Neither are guaranteed
If Enrique Lores can execute his aggressive turnaround plan, there could be some attractive upside on offer. But the near-term outlook looks challenging, and PayPal will need to motor harder in the second year to prevent profit falling further than guided. With macroeconomic uncertainty riding high, the risk of a further knock to sentiment can’t be ruled out.
Environmental, social and governance (ESG) risk
The technology sector is generally low-risk in terms of ESG, but some segments like Electronic Components can be more exposed to environmental risks. Regulatory interest in the sector has picked up recently, leading to more acute business ethics risks. Other key risks include labour relations, data privacy and product governance.
According to Sustainalytics, PayPal's overall management of material ESG issues is strong.
Concerns about anti-money laundering processes appear to have been addressed. The company fosters a culture of privacy by design and mandates annual employee training on data privacy. Its diversity programmes are well thought but staff turnover has been relatively high, a trend seen across much of the sector. PayPal is keen to highlight its place as a facilitator of donations to good causes. However there have been concerns raised about the transparency of its giving platform.
PayPal key facts
All ratios are sourced from LSEG Datastream, based on previous day’s closing values. 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 LSEG. 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.
This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment.