By Emily Bary
Fast growth in a less profitable part of PayPal's business is weighing on the company's margin outlook
Upbeat headline numbers from PayPal Holdings Inc. weren't enough to quiet concerns about the company's "profit engine."
Shares of PayPal (PYPL) were falling 10.7% in Tuesday morning trading after the payments giant beat expectations with its first-quarter results and raised some pieces of its outlook -- but cut its forecast for operating-margin growth. The culprit seemed to be faster relative growth for the company's unbranded Braintree checkout product, which is less profitable than the core branded checkout button that's familiar to consumers.
The stock was on track for its lowest close since Oct. 19, 2017, according to Dow Jones Market Data, and on pace to record its largest single-day percentage decline since Feb. 2, 2022, when it dropped 24.6%.
See more: PayPal logs earnings beat, but stock falls as margin talk underwhelms
"It appeared that mgmt focused more of the discussion on high-growth Braintree and the new SMB [small- and medium-sized business] unbranded offering-- but as this Q showed, the button is the profit engine of PayPal, and it is likely losing share in its key markets (e.g., US, UK, Australia)," Bernstein analyst Harshita Rawat wrote in a note to clients.
("With our branded checkout growing by 6.5%, we believe we improved our global share of checkout and gained share in unbranded processing," Chief Executive Dan Schulman shared on the earnings call. Unbranded checkout volume grew by 30%.)
The 6.5% growth in branded checkout was below the 8% to 10% growth in Visa Inc.'s (V) U.S. card-not-present volume for the first quarter, noted SVB MoffettNathanson analyst Lisa Ellis. The Visa metric is "a good measure of overall U.S. e-commerce growth," she continued, and PayPal's lagging relative growth suggests "continued competitive pressure on the high-margin checkout button."
See also: Visa earnings top expectations as payment volume rises 10% on travel rebound
Ellis rated the stock at outperform with a $90 price target.
In Rawat's view, the latest performance for the branded checkout button validated prior investor concerns about competition in this market.
"Blocking and tackling helps but in some ways the cards are increasingly stacked against PayPal given intensifying competition -- especially from Apple Pay, which has a native user experience and is doing exceptionally well in-app," she wrote. Plus, "auto-fills are getting easier, and card-on-file is getting increasingly tokenized."
Rawat rated the stock at market perform, and cut her price target to $85 from $90 Tuesday.
Credit Suisse analyst Timothy Chiodo, meanwhile, cited PayPal's margin dynamic as one reason behind his downgrade of the stock to neutral from outperform.
"Given the prospects for continued transaction margin pressures throughout 2023 (partly mix driven), PayPal's vertical skew (discretionary) in an uncertain macro backdrop, a pending management transition, and increasing competitive pressures (longer term), we find it challenging to recommend the shares at this time," he wrote.
Morgan Stanley's James Faucette looked at PayPal's branded performance more positively than some other analysts.
"While unbranded growth dynamics caused some earnings noise and drove down full-year margin expectations...we continue to view PayPal Branded growth as the priority for investors," he wrote. "In this regard, we think Branded growth cleared the bar in 1Q, with PayPal Branded growth of 6.5% representing a 200 [basis-point] acceleration vs. 4Q."
He added that "comparison to underlying e-commerce growth can be difficult based on variety of source estimates" but said that PayPal's acceleration at a time when "most underlying e-commerce figures were largely stable" suggests "improved growth differential relative to the underlying market."
He rated the stock as overweight with a $133 target price.
BofA Securities analyst Jason Kupferberg was upbeat as well in a note titled: "Moving parts net out positively."
"In our view, the totality of PYPL's print was positive in the context of current sentiment and valuation," he wrote, given that PayPal beat revenue expectations for the first quarter and forecasted second-half revenue ahead of expectations, while also accelerating volume growth.
The "enduring strength" of unbranded volume is creating profit challenges, he noted, though he thought PayPal shares "should be acting better" than they were in after-market action. The stock was down about 6% in after-hours trading Monday and is seeing steeper declines than that in Tuesday's regular session.
Kupferberg had a buy rating and a $112 target price on PayPal shares.
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May 09, 2023 10:29 ET (14:29 GMT)
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