PayPal's earnings estimates rise, but revenue outlook sends shares down again

The Cost Savings Story of PayPal Holdings Inc. started picking up last quarter, but that wasn’t enough to satisfy investors as the digital payments giant also cut its full-year revenue forecast in light of the “difficult macro environment.”

Shares fell 10% in after-hours trading after PayPal
PYPL,
-3.65%

executives cut their 2022 revenue guidance, saying they were now looking for 10% growth on a currency-neutral basis, while the previous forecast called for 11% growth.

Management lowered expectations a series of targeting metrics during this year.

“We’re executing on all the things we can control … and we’re cautiously preparing for a rough macro environment,” CEO Dan Shulman told MarketWatch. He added that PayPal is “seeing a pullback in consumer discretionary spending,” which is why he and the executive team feel the need to have a “reasonable” fourth-quarter earnings outlook.

Acting CFO Gabriel Rabinovitch added on the company’s earnings call that PayPal “didn’t see the early start to the holiday season” in October that the company saw in 2021.

See also: Block shares rocket higher after earnings as Square parent posts ‘strong beat across the board’

Although PayPal cut its full-year revenue forecast, it performed better on the top line in the third quarter. Revenue rose to $6.85 billion from $6.18 billion, while analysts had forecast $6.81 billion. PayPal’s total payment volume rose to $337 billion from $310 billion a year earlier. Venmo’s cap is $63.6 billion.

The lowered full-year revenue forecast outpaces progress on cost-savings program that executives outlined in the previous earnings report.

PayPal reported adjusted earnings of $1.08 per share last quarter, down from $1.11 per share a year earlier, but beating the FactSet consensus of 96 cents per share. Executives are now modeling $4.07 per share to $4.09 per share in full-year adjusted earnings, which is ahead of the previous forecast, which called for $3.87 per share to $3.97 per share.

“While there are a number of unknowns regarding the macro environment, we can largely control our costs and their impact on earnings growth,” Shulman said on the earnings call. “Of course, we’re also focused on investing for growth and balancing efficient spending with continued investment to drive future top-line growth.”

He added that the uncertain environment could also present an opportunity for PayPal.

“We think this is a time where the market share leaders are getting stronger,” Shulman said.

PayPal shares have fallen nearly 60% this year, as has the S&P 500
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-1.06%

is down 21.1%

Read: Amazon launches Venmo payment option

The company reported a boost in engagement in its most recent quarter, as transactions per active account rose 13% to 50.1 over the trailing 12-month period. PayPal added 2.9 million net new active accounts in the third quarter, bringing its total to 432 million. The FactSet consensus was for 432.9 million active accounts.

Earlier this year, PayPal began to shift its focus more to generate engagement among existing users than on attracting and retaining less active customers.

Shulman told MarketWatch that the company’s digital wallet has helped drive improved engagement trends, with PayPal seeing twice the level of engagement among those who use the app versus those who don’t.

PayPal executives announced several initiatives underway with Apple Inc.
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including future participation in the iPhone’s Tap to Pay program, which allows people to use their smartphones as payment acceptance devices without requiring additional hardware. In addition, PayPal and Venmo debit and credit cards will be eligible next year for inclusion in Apple Wallet. PayPal also plans to add Apple Pay as a payment option to its unbranded payment platform.

These developments mark a “significant step forward,” Shulman told MarketWatch.

He added on the earnings call that the Apple deal is “a bigger deal than most people realize,” given the trends the company has seen with Alphabet Inc.
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-4.11%

GOOGLE,
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Google Pay: “We’ve seen, for example, that Google Pay users in Germany, when they add their PayPal credentials there, have a 20% increase in their transactions when paying with a brand.”

See more: Apple will allow merchants to accept in-person payments with iPhones only

Executives offered a first look at expectations for 2023 in a presentation to investors on Thursday. They are aiming for adjusted EPS growth of at least 15%, as well as at least 100 basis points of operating margin expansion.

Schulman said EPS growth in the target range would put PayPal in the top quartile of S&P 500 components by the benchmark.

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