PayPal Investors Rattled by Earnings Report. But Should They Be?

The devil is in the details, but the longer view indicates that the payment processor is still on the path to growth.

Danny Vena
Danny Vena
Jul 25, 2019 at 2:04PM
Technology and Telecom

Expectations were high going into PayPal's (NASDAQ:PYPL) second-quarter earnings report Wednesday afternoon, and while the payment processor delivered on all the metrics that mattered, lowered full-year guidance sparked a sell-off. The stock initially fell more than 10% in after-hours trading, but was down only about 4.3% by Thursday afternoon.

Investors seemed to fear the worst from what they initially saw in the report. But look a little deeper into PayPal's results and you'll see that the company is still squarely on the right track.

PayPal reported revenue of $4.31 billion, which is up 12% year over year and near the midpoint of management's guidance but just short of analysts' consensus estimate of $4.33 billion. The results include a 7% revenue adjustment -- similar to last quarter -- related to the sale of receivables last year to Synchrony Financial.  

The PayPal logo on a sign outside the company's headquarters

Image source: PayPal.

Adjusted operating margins of 23.2% crept up from 21.3% during the year-ago quarter, resulting in adjusted earnings per share (EPS) of $0.86, a 47% increase year over year and sailing past the high end of the company's guidance of $0.70. In a regulatory filing earlier this month, PayPal explained that its EPS would benefit to the tune of $0.14 per share from its strategic investments. The largest contributor to that was Latin American e-commerce platform MercadoLibre, which received a $750 million investment from PayPal in March.

Operational success

There was a lot to like in PayPal's operational metrics, which served as the foundation for its financial success.

The company added 9 million net new active accounts, an increase of 17% year over year. All told, PayPal ended the quarter with 286 million customer accounts, up 28% compared to the prior-year period.

In addition to its growing customer base, engagement among PayPal's existing customers is increasing. Transactions per active account over the trailing-12-month period grew to 39, up 9% year over year. PayPal's payment's business continues to soar: The company processed 3 billion transactions, a 28% increase year over year and up 7% sequentially, driven higher by the addition of new users and greater activity by existing customers.

This combination of factors fueled PayPal's fast-growing total payment volume (TPV), which represents the total dollar value of the transactions processed by PayPal. TPV soared to $172 billion, jumping 24% from the prior-year quarter. That number would have increased by 26% without the impact of foreign currency exchange headwinds. 

Person-to-person (P2P) payments continued to show strong growth, soaring 40% year over year and topping $46 billion. P2P now represents 27% of TPV, compared to 24% this time last year. A large part of that growth comes directly from payments app Venmo, which grew 70% year over year to $24 billion in TPV.

A new opportunity

During the Q2 conference call, CEO Dan Schulman spent some time laying out the value proposition of the recently introduced PayPal Commerce Platform. Schulman described it as an e-commerce solution "designed to meet the specific needs of marketplaces, e-commerce platforms, and crowdfunding sites by bringing together a comprehensive set of technologies, tools, services and financing solutions for businesses of all sizes." The company is well-positioned to provide these services because of its unique two-sided network, linking both customers and merchants using its services.

PayPal's made a number of recent acquisitions that feed this suite of tools to help merchants succeed in the e-commerce arena. These include:

  • Simility: It provides businesses with fraud prevention capability.
  • Jetlore: It uses machine learning to help merchants optimize content and communication to create personalized shopping experiences for customers.
  • Hyperwallet: It distributes payments to merchants that sell goods via online marketplaces, in multiple currencies and in more than 200 countries around the world.

Each of these acquisitions helped PayPal fill out a more robust set of capabilities for online merchants.


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What lies ahead?

While investors may have been satisfied with PayPal's financial and operational performance, they were less enthusiastic about the company's outlook. PayPal had previously forecast revenue of $17.975 billion at the midpoint of its guidance but lowered that by $275 million.

On the conference call, CFO John Rainey cited a couple of reasons for the downgrade in its forecast. PayPal is in the midst of several big product integrations with partners that, due to their scope, are experiencing delays. The company also delayed implementation of certain price changes. However, Rainey pointed out that, while the benefit of those moves has shifted out a few quarters, the sizable opportunity remains.

Finally, Rainey reminded investors that 20% of PayPal's payment volume is cross-border and is affected by changes in foreign exchange rates. With the recent strength of the U.S. dollar, the impact is greater than the company originally anticipated, necessitating the change in its forecast.

While investors were initially rattled by the lowered guidance, the longer view shows that PayPal continues on the path to payments domination.