PayPal Earnings: Mixed Results, New CEO Outlines His Plans

We think PayPal’s PYPL third-quarter results were mixed, and management’s guidance suggests that the fourth quarter will be a little softer than expected. However, we are encouraged by comments from new CEO Alex Chriss and see his thoughts on PayPal’s long-term prospects are roughly in line with our own. We will maintain our $135 per share fair value estimate for the narrow-moat company and view the shares as deeply undervalued.

Net revenue grew 9% year over year on a constant-currency basis. Volume for PayPal branded grew 6% in constant currencies, and unbranded (which is primarily Braintree) saw 32% volume growth. In both instances, the growth rate accelerated modestly from the second quarter. PayPal branded growth could be seen as disappointing, though, given that management previously communicated that this area had seen growth accelerate significantly in July. This appeared to have moderated, and management expects the trend to continue into the fourth quarter. Active accounts continued to decline modestly on a sequential basis, but year-over-year growth in transactions per active account held strong at 13%.

PayPal continues to see pressure on transaction margins, although the rate of sequential decline slowed in the third quarter. A 12% year-over-year decline in non-transaction costs created a partial offset, but adjusted operating margins declined modestly to 22.2%, compared with 22.4% last year. Management lowered its full-year adjusted margin improvement guidance to 75 basis points from 100 basis points, pointing to some additional margin pressure as the company sees a bigger volume shift to the lower-margin Braintree business. We think some margin pressure is understandable in the current situation but would like to see PayPal maintain operating margins as it moves into 2024.