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PayPal - rising payment volumes push revenue up

PayPal posted second quarter revenue growth of 9% to $6.8bn, driven by an equivalent increase in Total Payment Volume...

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PayPal posted second quarter revenue growth of 9% to $6.8bn, driven by an equivalent increase in Total Payment Volume.

Underlying operating profit fell 21.3% to $1.3bn, largely a result of higher costs. Cash metrics fared much better, with operating cash flow up 12% to $1.5bn.

Full year revenues expected to reach $27.85bn. That reflects growth of 10%, slightly below previous guidance. Underlying earnings per share is expected in the range of $3.87-$3.97.

The board authorised the buyback of a further $15bn of shares and expects total buybacks in 2022 to be around $4bn.

The shares were up 11.3% in after-hours trading, following yesterday's announcement.

View the latest PayPal share price and how to deal

Our view

PayPal's rate of payment volumes growth has fallen yet again in the second quarter but is still expected to be in double digits for 2022. 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 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 shown its ability to innovate and become a trusted partner to smaller businesses. Its Zettle platform allows entrepreneurs to deploy electronic point of sale (EPOS) terminals on the move. More recently enabling the same merchants to use their android phone as a payments terminal on which customers can simply tap their card or payment device.

As well as the transition to digital payments, the group's well placed to benefit from the rise of the gig economy. PayPal's Braintree payment gateway currently processes some 95% of transactions for Just Eat's subsidiary Grubhub.

Margins have fallen of late, as costs have risen cross the board. But there's still levers it can pull and it's expecting to deliver $900m in cost savings over 2022. When combined with further initiatives, that's expected to increase to $1.3bn in 2023.

The earnings multiple has fallen well below the 10-year average over the last couple of years. If growth rates continue to decelerate there may be further downside. But for those willing to accept the risks, this could present an opportunity to gain exposure in the electronic payment arena.

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.

Second Quarter Results

PayPal continues to drive growth from newer partnerships, with non-eBay revenue up 14%. Product upgrades in the period include the launch of crypto transfers between PayPal and other wallets and exchanges, and an extension of the Shopify relationship into the French market.

Transaction revenue rose 8% to $6.3bn, representing 92% of total revenue. Service revenue grew faster, up 21% to $534m and 10% up vs the previous quarter. Geographically, the US was the standout with growth of 18% against a 1% decline from international markets.

Free cash flow was up 22% to $1.3bn. Net cash at the period end totalled $5bn.

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
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 3rd August 2022