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PayPal - 2023 guidance nudged up, CEO to step down

Fourth quarter net revenues climbed 9% to $7.4bn, ignoring exchange rate movements. This was in line with market forecasts...

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Fourth quarter net revenues climbed 9% to $7.4bn, ignoring exchange rate movements. This was in line with market forecasts. Meanwhile, underlying earnings per share of $1.24 were up 11%, 3% better than analyst expectations.

Revenue growth was driven by a 9% increase in Total Payment Volume, to $357bn.

Underlying operating income was up 12% to $1.7bn. That's a margin of 22.9%, up from 21.8% for the same period in 2021. This was helped by a 6% decrease in expenses not related to the processing of customer payments.

Free cash flow was flat at $1.4bn. PayPal repurchased a further $1.0bn of its own shares during the quarter and ended the period with net cash of $0.5bn, down from $1.5bn the previous year end.

PayPal expects net revenue growth of about 9% in the first quarter, with an operating margin in the region of 22%. Underlying earnings per share are expected to increase by 23-25%. For the full year, that growth rate is now expected to be 18% up from previous guidance of 15%.

Dan Schulman, CEO, is set to step down at the end of 2023.

The shares were broadly flat in after-hours trading.

View the latest PayPal share price and how to deal

Our view

Dan Schulman's successor is going to have a tough act to follow. He's overseen a period of stellar growth for PayPal, which processes five times the value of payments it did back in 2015. But that growth's been slowing consistently over the last couple of years, now into single digits. The slowdown coincided with an increasing cost burden, and as a result profit margins were squeezed.

However, an aggressive cost cutting program introduced in the middle of last year has seen margins recover of late. That, and the significantly smaller pool of shares in the market following $4.2bn buybacks last year, is underpinning management's confidence in earnings growth for 2023. The jury is still out on how long and deep the current economic downturn will be, but we think the long-term outlook is exciting.

PayPal's a beneficiary, and indeed an architect, of an ongoing shift to digital payments that was materially accelerated by the pandemic. Yet, despite the scale, there's still a lot of market share to go for. Last we heard consumer penetration below 50% in its core markets. A robust balance sheet, and free cash of over $5bn in the year just gone, gives firepower to make acquisitions to reach new customers or distribute cash to shareholders. Remember, no returns are ever guaranteed.

PayPal's driving its 'branded checkout' solutions hard. This offering allows businesses to put their own name to the payment solution. We like the choice to work closely with other enablers of eCommerce, such as Apple, rather than competing head-to-head with their payment solutions.

The relationship with Apple's going a step further, enabling iPhones themselves to become a mobile payment terminal for vendors. Looking to next year, consumers should be able to add their PayPal and Venmo credit cards to their Apple Wallet. This gives users further opportunities to choose PayPal as their preferred payment option, both online and in-store.

One area of note that is enjoying strong growth is the buy now pay later offering. That's no surprise, as consumers grappling with a cost-of-living crisis burn through their savings at a rate of knots.

The earnings multiple has fallen well below the ten-year average over the last couple of years, reflecting the slowdown in growth and pressure on the bottom line. This could 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. Remember, if in the near-term growth rates continue to decelerate there may be further downside and there are no guarantees.

PayPal key facts

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.

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. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Derren Nathan
Derren Nathan
Head of Equity Research

Derren leads our Equity Research team with more than 15 years of experience in his field. Thriving in a passionate environment, Derren finds motivation in intellectual challenges and exploring diverse ideas within his writing.

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Article history
Published: 10th February 2023