'Long Road Of Rebuilding Begins': PayPal Analysts React To Mixed Q1 Earnings Report

Shares of PayPal Holdings Inc PYPL gained 11% on Thursday after the company reported a revenue beat but cut its 2022 guidance.

On Wednesday, PayPal reported adjusted first-quarter EPS of 88 cents, in-line with analyst estimates. Revenue for the quarter was $6.5 billion, ahead of consensus expectations of $6.4 billion. Revenue was up 8% from a year ago.

PayPal cut its full-year EPS guidance from a previous range of between $4.60 and $4.75 to a new range of between $3.81 and $3.93. It also reduced its full-year revenue growth guidance from a previous range of between 15% and 17% to a new range of between 11% and 13%.

PayPal also said it added 2.4 million net new active accounts in the first quarter and guided for 10 million net new account adds in 2022.

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Uncertain Outlook: RBC Capital Markets analyst Daniel Perlin said it's difficult to say at this point whether the guidance cut was a one-time recalibration or a sign of more difficulties to come.

"Given the guidance reset, which we believe, all else equal, has helped to de-risk numbers for the remainder of the year, we now view the risk/reward as tilting positive, but acknowledge the company’s new strategy to pivot to engagement vs. pure NNA growth will have to deliver proof-points before we could see a meaningful rebound in the shares," Perlin wrote.

Wells Fargo analyst Jeff Cantwell said investors and analysts are likely still trying to piece together what exactly the PayPal guidance cut means.

"Maybe it's as simple as: expect e-com growth will remain challenged in this environment, following its hyper-growth phase during the pandemic (TPV: 13% in 1Q on a 50% comp)," Cantwell wrote.

JMP analyst David Scharf said PayPal's horrendous share price performance year-to-date has it trading at a significant discount to its historical levels, and extremely low expectations and valuation support may be largely responsible for Thursday's rally.

"Our sense is that investor expectations had not anticipated an outlook that suggested normalized earnings growth as high as ~15% exiting the year, and positive indicators of improvements in engagement (with incremental engagement up 19% ex-eBay)," Scharf wrote.

No Clear Catalysts: Raymond James analyst John Davis said the latest 2022 guidance cut will likely be PayPal's last, but the stock doesn't have any clear catalysts in the near term.

"While this appears draconian, the downward revision to guidance and the removal of mid-term targets was largely expected by investors and provides a more realistic baseline for forward expectations," Davis wrote.

Rosenblatt Securities analyst Sean Horgan said the "long road of rebuilding begins" for PayPal.

"In short, we see the short term as uncertain and more at-risk to the downside, but the risk/reward in the mid-to-long term as an attractive risk/reward opportunity to the upside," Horgan wrote.

BMO Capital Markets analyst James Fotheringham said PayPal's expectations are now reset at a conservative level.

"PYPL faces headwinds from inflation pressuring discretionary spending, loss of Russian business and related geopolitical uncertainty, supply chain constraints, decelerating ecommerce growth, extended impact of eBay contract expiry, outsized momentum in low-margin unbranded Braintree transactions, and slowing international growth," Fotheringham wrote.

Growth Story Intact: Needham analyst Mayank Tandon said PayPal's current valuation seems reasonable given the near-term uncertainties the company is facing.

"While we view PYPL as a LT winner in the digital payments space, the NT outlook is disappointing due to a multitude of factors including the heightened uncertainty relating to several macroeconomic trends (rising inflation, supply chain constraints, softer e-commerce volumes, etc.), the ongoing eBay transition, and mixed messaging on balancing growth versus expanding margins," Tandon wrote.

KeyBanc analyst Josh Beck said he maintains his favorable view on PayPal's strategic shift to a digital wallet with an emphasis on breadth.

"Management pointed to digital wallet and checkout products as a primary focus, with savings, additional financial services, and a commerce functionality suite expected to roll out before EOY," Beck wrote.

Morgan Stanley analyst James Faucette said PayPal's growth formula still makes sense.

"However, investors may wait to have that proven out as they look for ecomm growth to normalize and product investments to bear fruit," Faucette wrote.

Ratings And Price Targets:

• RBC Capital Markets had an Outperform rating and a $110 target.
• Wells Fargo had an Overweight rating and a $115 target.
• JMP had a Market Outperform rating and a $112 target.
• Raymond James had a Market Perform rating.
• Rosenblatt Securities has a Buy rating and a $180 target.
• BMO Capital Markets has an Outperform rating and a $114 target.
• KeyBanc has an Overweight rating and a $125 target.
• Needham has a Hold rating.
• Morgan Stanley has an Overweight rating and a $139 target.

Photo: Courtesy PayPal