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PayPal - revenue grows but margins remain under pressure

Paypal's third-quarter Total Payment Volumes climbed 13% to $387.7bn, ignoring exchange rate impacts.

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PayPal's third-quarter Total Payment Volumes climbed 13% to $387.7bn, ignoring exchange rate impacts. This drove 9% revenue growth to $7.4bn, ahead of market forecasts , with a strong performance in Other Value Added Services (OVAS).

Underlying operating profit rose 8% to $1.6bn as a result of the higher revenue. The associated margin fell slightly to 22.2%, as lower-margin unbranded payment volumes continued to grow significantly faster than the rest of the business. But the majority of this negative impact was offset by cost-saving measures.

Free cash flow improved from $1.6bn to $1.9bn, excluding the impact of buy-now-pay-later loans. Net cash stood at $907m, up from $451m. The group completed $1.4bn of share buybacks in the quarter, with $5bn targeted for the year as a whole.

Revenue is expected to grow between 7-8% in the fourth quarter. Full-year underlying operating margin expansion guidance has been lowered for the second time this year, down from more than 1 percentage point to around 0.75 percentage points.

The shares rose 7.39% following the announcement.

View the latest PayPal share price and how to deal

Our view

Freshly minted CEO, 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).

PayPal's third-quarter revenue came in ahead of market expectations, and total payment volumes being made using PayPal's technology have proved to be resilient in the face of an ongoing cost-of-living crisis.

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 suggests that this may be proving harder than first thought.

An aggressive cost-cutting program introduced in the middle of last year is helping to keep operating profit margins broadly flat, but there's only so long this can offset the lower profitability of PayPal's changing business mix.

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 flows of $1.9bn in the third quarter give firepower to make acquisitions to reach new customers or distribute cash to shareholders. But 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, and it's something we'll be keeping a close eye on as it progresses.

PayPal is a name consumers and retailers trust, being one of the most widely accepted digital wallet solutions there is. But declining margins and increasing competition have put serious downward pressure on PayPal's valuation, which now sits well below its long-run average. A recovery in margins will be key to turning round the group's fortunes, but it's unlikely to be smooth sailing and nothing is guaranteed.

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.

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Written by
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 2nd November 2023