PayPal's Solid Transaction Growth Boosts Confidence, Yet Q4 Revenue Guidance Dampens Enthusiasm: Analyst

JP Morgan analyst Tien-tsin Huang maintained an Overweight rating on PayPal Holdings, Inc PYPL.

On Tuesday, PayPal reported fiscal third-quarter revenue growth of 6% to $7.85 billion, marginally missing the analyst consensus estimate of $7.88 billion. 

Total payment volumes increased 9% to $422.6 billion in the quarter.

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Payment transactions were up 6% to $6.6 billion, and the payment transactions per active account increased 9% on a trailing 12-month basis to $61.40. Total active accounts decreased by 0.9% to 432 million.

PayPal expects fourth-quarter revenues to increase by a low-single-digit percentage compared to $8.03 billion in the prior year’s period and the consensus of $7.81 billion. It expects adjusted EPS of $1.03-$1.07, compared to the consensus of $1.10.

PayPal’s third-quarter revenue growth reached 6%, aligning closely with JP Morgan and Street expectations and the company’s mid-single-digit guidance.

On a constant currency basis, revenue growth was slightly more robust at 6% compared to JP Morgan’s 4% estimate.

Transaction margin dollars (TMD) increased 8% (6% excluding float income), outperforming JP Morgan and Street’s 3% and 4% projections and matching last quarter’s 8% growth.

Management attributed broad-based TMD gains to interest in customer balances (adding two percentage points), tech-led risk and loss improvements, and growth in branded checkout, Venmo, and Braintree.

Total Payment Volume (TPV) increased 9% as expected (JP Morgan and Street at 9%), with a transaction take rate of 1.67%, slightly below JP Morgan and Street’s estimates of 1.68% and 1.69%.

Transaction expenses were approximately five basis points lower than JP Morgan’s forecast, thanks to improved product, geographical mix, and favorable rate changes.

Branded volume grew 6% in constant currency, stable from the previous quarter, while PSP volume rose 11%, down from 19% last quarter but supporting TMD gains, consistent with PayPal’s price-to-value strategy. Non-transaction expenses rose 3% (compared to JP Morgan and Street expectations of flat growth) due to marketing investments, resulting in about 190 basis points of margin expansion and adjusted EPS of $1.20, beating JP Morgan and Street estimates of $1.06 and $1.07, respectively.

For the fourth quarter, PayPal guided for low single-digit revenue growth, down from JP Morgan and Street forecasts of 6% and 5%, likely reflecting a continuation of the PSP price-to-value strategy.

Given the anticipated rise in marketing spending, adjusted EPS is projected to decline in the low-to-mid single digits, in line with JP Morgan and Street’s expected drops of 6% and 3%, respectively.

For the full year, PayPal raised its TMD growth outlook to mid-single digits, up from the previous low-to-mid range. Non-transactional operating expenses are expected to grow in the low single digits, consistent with the prior “slight increase” guidance.

Adjusted EPS growth was lifted to the high teens, up from the previous low-to-mid teens, with JP Morgan and Street estimating 15% and 16%, respectively. Free cash flow guidance remains steady at $6 billion.

Stock reaction pre-call will likely be mildly positive. PayPal’s strong TMD results and broad growth drivers (with 6% ex-float growth above Street estimates) balance a fourth-quarter TMD forecast that aligns with prior expectations, potentially leaving room for upside.

PayPal’s stock has risen 27% since last earnings, compared to a 5% increase in the S&P 500.

Price Action: PYPL stock is down by 4.14% at $80.13 at the last check on Tuesday.

Image via Shutterstock

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