PayPal’s net revenue grew by 6% when ignoring currency moves to $8.4bn, with a 7% increase in payment volumes slightly offset by lower transaction fees. Underlying operating profit rose 6% to $1.6bn.
Underlying free cash flow rose by 48% to $2.3bn, boosted by the timing of credit collections. Net cash came in at $0.5bn.
The mid-point of full-year transaction margin dollar guidance has been raised slightly to $15.5bn. Underlying earnings per share growth guidance has improved from 11-16% to 15-16%.
The company repurchased $1.5bn of shares and has launched a dividend program with a targeted payout of 10% of underlying net profit. The Board declared a quarterly dividend of $0.14 per share.
Separately the company announced a partnership with Open AI.
The shares rose 16% in pre-market trading.
Our view
PayPal’s third quarter results came in a little better than expected supporting a small upgrade for the year.. While the outlook for consumer spending is a little mixed, we see some scope for another modest beat when the company next reports.
However, the main driver of the uplift in investor sentiment on results day wasn’t the numbers, but news that instant checkout with PayPal would soon be available in ChatGPT. We’re pleased to see the company taking an early seat at the table in what could be the next big shift in how we shop. But, as with eCommerce, competition in the AI payment’s world is likely to be fierce.
Efforts are underway to reinvigorate the all-important branded checkout business experience. Adoption of recent initiatives such as PayPal Everywhere which allows users to pay in both online and in-store is encouraging. However, growth in core online payment’s remains a little underwhelming - hampered by both economic and operational challenges. There’s a lot of work to be done if PayPal is to capitalise on the long-term opportunities we see in digital payments.
There are some encouraging signs of progress elsewhere in the business. The company’s credit offering is performing well, and its unbranded payments processing arm looks in a better position now the focus has moved to profitable growth.
Looking ahead, Artificial Intelligence isn’t the only trend management hope to capitalise on. Personalised advertising and the integration of cryptocurrencies and stablecoins into the PayPal wallet are also on the table. But these initiatives are likely to require further investment and carry substantial execution risk. Investors will still need more convincing that PayPal is keeping up with the pack.
A robust balance sheet and strong free cash flows support the forecasted increase in capital expenditures and ongoing share buybacks. Dividends are also now on the table but are unlikely to make a big difference to income investors. No payments can be assured.
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. Growth rates continue to lag its peers and that’s reflected in a valuation towards the bottom of the group. Management has work to do if it wants to close the gap.
Environmental, social and governance (ESG) risk
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.
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 LSEG. 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.