Paypal Holdings Inc (PYPL) USD0.0001

PayPal's fourth-quarter Total Payment Volumes climbed 13% to $409.8bn, ignoring exchange rate movements. This drove 9% revenue growth to $8.0bn, ahead of previous guidance.

Underlying operating profit rose by 11% to $1.9bn benefitting from the increased revenue and disciplined control of the cost base.

Underlying free cash flow fell by 46%, reflecting the impact of higher cash taxes, and the timing of certain operational receipts and payments. Net cash at the year-end was $4.4bn.

The group completed $5bn of share buybacks in 2023 and expects to at least equal this figure in 2024.

Revenue is expected to grow by 7% in the first quarter of 2024, ignoring the impact of exchange rates. For the full year, underlying earnings per share (EPS) are expected to be broadly flat compared to the $5.10 reported for 2023.

The shares fell 11.2% following the announcement.

Our view

PayPal is a pioneering name in the electronic payments industry. And that's a sector where we still see plenty of structural growth drivers. But the model is facing some strong headwinds. In the digital wallet space, competition is intensifying from the likes of Apple Pay and Google Wallet, which are vying to become consumers' preferred payment method of choice. The space is becoming equally crowded in terms of services to merchants, and here there are newer entrants with arguably superior technology offerings.

What PayPal does have on its side is scale, and for now, it remains the market leader in online payment processing. But the competitive pressure means growth is getting harder to come by.

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.

But we have some concerns about the lower profitability of payments in the unbranded side of the business and we're not alone. Despite ending 2023 with a flourish, the market's been disappointed by guidance issued for CEO Alex Chriss's first full year at the helm.

Looking ahead, he's firmly focussed on improving the Group's offer to both businesses and consumers. We're glad to see increased efforts to re-invigorate the branded checkout business. But there's a huge job to do and it will be some time before we know if the upfront cost can drive margin growth and customer acquisition.

Some of this bill is being mitigated by an aggressive cost-cutting program. There's more of that to come this year but trimming the cost base can't offset lower profitability indefinitely without negatively impacting the ability to grow and innovate.

A robust balance sheet, and strong free cashflows give firepower to make acquisitions or distribute cash to shareholders. But remember, no returns are ever guaranteed.

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. Margins are moving in the right direction again but a consistent continuation of this trend will be key to turning around the group's fortunes. It's unlikely to be smooth sailing, and nothing is guaranteed.

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 as a facilitator of donations to good causes. However there have been concerns raised about the transparency of its giving platform.

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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