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PayPal - Q1 revenues up 10%, margin outlook trimmed

First quarter net revenues climbed 10% to $7.0bn, ignoring exchange rate movements.

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First quarter net revenues climbed 10% to $7.0bn, ignoring exchange rate movements. Revenue growth was driven by a 12% increase in Total Payment Volume to $354.5bn.

Underlying operating profit expanded faster than revenue, up 19% to $1.6bn. That's a margin of 22.7%, ahead of guidance, but a small drop from the previous quarter.

Non-transactional expenses, such as marketing and operations, were down around 12%. But margins on transactions were the lowest seen in the last six quarters reflecting a shift in mix towards lower margin unbranded processing.

Free cash flow was down by 3% to $1.0bn, reflecting an increase in tax payments. PayPal bought $1.4bn of its own shares in the quarter with about $4bn expected across the year.

Net cash stood at $179m down from $451m.

Second quarter revenue is expected to grow between 7.5% to 8%. For the full year, underlying earnings per share guidance has been raised slightly to about $4.95. Underlying operating margin growth guidance now points to an expansion of at least 1 percentage point against previous guidance of about 1.25 points.

The shares fell 12.7% on the day following the announcement.

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.

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 per share 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's below 50% in its core markets. A robust balance sheet, and free cash 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.

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 transaction margins in the unbranded side of the business and PayPal tells us there's a plan to improve this, but only time will tell how successful this will be.

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. But we think that analyst forecasts of double-digit operating profit growth for this year and next remain achievable in the absence of any economic shocks - and that's no bad thing.

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. 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 May 2023