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PayPal - 3rd quarter beats expectations. Guidance disappoints

Net revenues climbed 12%, ignoring exchange rate movements, to $6.85bn.

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Net revenues climbed 12%, ignoring exchange rate movements, to $6.85bn. This was slightly better than the $6.82bn expected by the market. Meanwhile, underlying earnings per share of $1.08 were 12.5% better than analyst forecasts.

Revenue growth was driven by a 14% increase in Total Payment Volume to $337.0bn.

Underlying operating income saw a return to growth, up 4% to $1.5bn. That's a margin of 22.4% , up from 19.1% in the last quarter. However, margins are still 5.3 percentage points lower than a year ago, with reductions in each of the five previous quarters.

Underlying operating costs were up 12.8% to $5.3bn.That's a significant decrease in the rate of cost growth over recent quarters, driven largely by slower growth in non-transactional expenses, such as sales and marketing, and operations.

Free cash flow was up 37% to $1.8bn, helped by higher cash profit as well as improved cash conversion. PayPal bought back $939m of its own shares in the quarter. That's $3.2bn so far this year.

Net cash totalled $0.2bn, down from $4.4bn this time last year.

For the fourth quarter Paypal expects net revenue of about $7.4bn, a growth rate of 9%, but light of the $7.74bn expected by average analyst forecasts. Paypal pointed to a final quarter underlying operating margin of about 22.5%.

The shares were down 9.7% in after-hours trading.

View the latest PayPal share price and how to deal

Our view

PayPal's underlying rate of payment volumes growth has been relatively stable in the last three quarters. But alongside revenue this could well dip into single digit territory for the final quarter of 2022. That's not a huge surprise to us, given the headwinds building for consumers. Total Payment Volumes remain the key driver of the Group's financial performance, at least at the revenue level. Against the backdrop of a weak global economy, and an already massive scale, double digit growth for 2022 as a whole is impressive.

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, PayPal's flagship platform has a lot of market share it can go for, with consumer penetration below 50% in its core markets. A robust balance sheet, and free cash flow that's expected to exceed $5bn this year, 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 that PayPal's working closely with other enablers of eCommerce, such as Apple, rather than competing head-to-head with their payment solutions. Just recently PayPal launched Passkeys for Apple products, allowing password free logins using methods such as fingerprint and facial recognition.

PayPal's taking its relationship with Apple a step further, enabling iPhones themselves to become a mobile payment terminal for vendors. Looking to next year, PayPal expects that consumers will 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.

Following a period of margin decline, its pleasing to see signs of a reversal in this trend. But there's still levers it can pull and it's expecting to deliver $900m in cost savings over 2022. PayPal hopes to add at least one percentage point to its underlying operating margin in 2023. This will in some part depend on transaction volume growth holding up. We're cautious on the outlook here, which to a large extent still depends on the health of the global economy.

The earnings multiple has fallen well below the 10-year average over the last couple of years. For those willing to accept the risks, this could present an opportunity to gain exposure in the electronic payment arena. Remember if 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: 4th November 2022