Paypal reported a 2% rise in first quarter net revenue, ignoring currency movements, to $7.8bn. Transaction volumes grew 4%, with peer to peer and other consumer experienced the strongest uplift. Though that was softer than the 7% growth in the prior quarter.
Underlying operating profit was up by 16% to $1.6bn helped by the business mix which saw transaction margin (a bit like gross profit) rise 7%, as well as good control of non-transaction related expenses.
Underlying free cash flow fell by 26% to $1.4bn reflecting lower conversion of operating profit into cash. Net cash totalled $3.2bn. The company repurchased $1.5bn of shares in the quarter.
PayPal reported a ‘good’ start to the second quarter but leaves full year guidance unchanged ‘due to global macro uncertainty’ with transaction margin expected to grow 4-5%.
The shares were down 3.9% in pre-market trading.
Our view
Paypal’s struggled to grow its topline in the first quarter and markets weren’t impressed. Weakening consumer sentiment may be partly to blame, but question marks remain about the payment’s company’s competitive position in the face of stiff competition, which includes the likes of Apple Pay and Google Wallet.
But there were also some signs of progress. PayPal’s been chasing growth at any expense for too long and we take some comfort in the shift towards higher margin business.
Until recently PayPal's strongest volume growth had been its unbranded option which allows businesses to put their own name to the payment solution, but it’s starting to come up against some more challenging comparisons. 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 increasingly turn to credit to fund their spending.
Management’s focus has shifted from unbranded volume to profitability, but it’s important that functionality is further enhanced if it wants to keep growing market share as it firms up prices.
We're glad to see efforts to re-invigorate the branded checkout business drive some traction. Its blue and gold buttons are well trusted by consumers but in this fast-changing space that’s not enough. Its Fastlane checkout has attracted some big corporate customers but mid-single digit volume growth is hardly the growth story seen in PayPal’s glory days.
Investors will still need more convincing that PayPal is keeping up with the pack. Increased marketing investment is one lever that management’s pulling, which is all well and good, but we’ll want to see an improvement in growth rates as a result.
A robust balance sheet, and strong free cash flows give firepower to make acquisitions, invest internally in upgrading the product suite, or distribute cash to shareholders. But remember, no returns are ever guaranteed.
PayPal has made some bold strategic choices to move the business forward, but we’d like to see its market share moving in the right direction before getting too excited. PayPal’s growth rates continue to lag its peers and that’s reflected in a valuation towards the bottom of the group. Management certainly has its work cut out if it wants to close the gap.
Environmental, Social & Governance Risks
The technology sector is generally low-risk in terms of ESG, but some segments like Electronic Components can be more exposed to environmental risks. Regulatory interest in the sector has picked up recently, leading to more acute business ethics risks. Other key risks include labour relations, data privacy and product governance.
According to Sustainalytics, PayPal's overall management of material ESG issues is strong.
Concerns about anti-money laundering processes appear to have been addressed. The company fosters a culture of privacy by design and mandates annual employee training on data privacy. Its diversity programmes are well thought but staff turnover has been relatively high, a trend seen across much of the sector. PayPal is keen to highlight its place as a facilitator of donations to good causes. However there have been concerns raised about the transparency of its giving platform.
Paypal key facts
All ratios are sourced from LSEG Datastream, based on previous day’s closing values. 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.
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