What happened

Shares of PayPal Holdings (PYPL -1.74%) declined by 10.5% on Tuesday after the sales and profit outlook of the digital payments company fell short of the market's expectations. 

So what 

PayPal's revenue rose 13% year over year to $6.2 billion in the third quarter. The gains were fueled by a 26% rise in total payment volume, to $310 billion.

Notably, PayPal continues to add new users at a solid clip. The payments platform gained 13.3 million net new active accounts during the quarter, bringing its total account base to 416 million.

Moreover, PayPal's cash production remained strong. Operating and free cash flow climbed 15% and 20%, respectively, to $1.5 billion and $1.3 billion. That allowed PayPal to reward shareholders with $350 million in stock repurchases.

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Image source: Getty Images.

Now what 

But investors appeared to focus on PayPal's muted guidance. Management expects revenue of $6.85 billion to $6.95 billion and adjusted earnings per share of $1.12 in the fourth quarter. That was below Wall Street's estimates, which had called for revenue of $7.24 billion and adjusted per-share profits of $1.27. 

CEO Dan Schulman said during a conference call with analysts that multiple factors are contributing to PayPal's cautious outlook for the holiday shopping season: 

We are seeing the impact of global supply chain shortages in our merchant base. Consumer confidence has weakened with the absence of stimulus payments. And with the economy reopening, more people may be likely to do their holiday shopping in-store as confidence in delivery logistics is depressed from last year.

eBay's (EBAY -1.24%) transition to its new managed payment system is also weighing on PayPal's results. PayPal's eBay marketplaces volume declined 45% in the third quarter.

To help offset this lost payment volume, PayPal struck a deal with Amazon (AMZN 2.11%). Shoppers on Amazon will be able to use PayPal's popular Venmo payment service as a checkout option beginning in 2022.