PayPal (PYPL 0.34%) delivered a solid first-quarter earnings report on Monday, but the stock still dove on the news as Wall Street was unhappy with lower guidance in its operating margins.
Shares of the digital payments leader have tumbled since peaking in 2021 as growth in the industry has slowed. Consumer spending has moved away from tech-centric channels like e-commerce, and the company has faced increasing competition from Apple and others.
However, even as the stock fell by double digits, PayPal still delivered solid results.
Revenue rose 9% to $7.04 billion, while total payment volume was up 10% to $354.5 billion. The slight decline in the take rate, or the percentage of payments it keeps as revenue, was due to a shift from branded to unbranded revenue. Unbranded revenue, or revenue from other value-added services, was up 39% to $676 million, driven by its Braintree unit, which helps merchants accept PayPal and non-PayPal payments. Branded, or transaction revenue, which centers around the PayPal button, increased by 6% to $6.36 billion.
Results further down the income statement were solid, too, as adjusted operating income rose 19% to $1.6 billion, and adjusted earnings per share jumped 33% to $0.88. Both top- and bottom-line results easily beat analyst expectations.
Margins expanded due to slower growth in operating costs, and the company also said it would lay off 7% of its workforce in the quarter, further cutting costs.
As the chart below shows, several of PayPal's operating expenses declined in the quarter, helping it deliver strong profit growth.
Image source: The Motley Fool.
Nonetheless, investors were unhappy with the performance.
Value, or value trap?
Not long ago, PayPal was a highly regarded growth stock. After it was spun off from eBay in 2015, the stock marched steadily higher for several years, gaining more than 600% over the last several years before giving up most of those gains over the last two years. The stock is now down nearly 80% from its peak in 2021.
Based on the company's adjusted earnings per share forecast of $4.95 this year, up 20% from the year before, the stock now trades at a price-to-earnings (P/E) ratio of just 13, a valuation normally reserved for sleepy, slow-growth stocks in mature industries. By comparison, the S&P 500 currently trades at a P/E ratio of 24, meaning that PayPal is nearly half as cheap as the typical S&P 500 stock.
That seems like a mistake, and the company is capitalizing on that discount by buying back its stock, a sign that management thinks it's cheap. In the first quarter, it bought back $1.4 billion worth of stock and is targeting $4 billion in repurchases, or more than 5% of shares outstanding.
Is PayPal a buy?
It's going to take more than share buybacks to turn the stock around, but there are other reasons to be bullish about the stock. The macroeconomic headwinds should eventually fade as the global economy emerges from the current inflationary period, and CEO Dan Schulman also talked up investments in artificial intelligence (AI) on the earnings call, saying the technology has the ability to "meaningfully lower our costs for years to come."
Meanwhile, the impact of the layoffs should also give margins a boost later in the year, and there are significant opportunities to monetize and expand products like Venmo.
Traditionally, payments has been a high-margin, highly scalable business, as the success of credit card leaders Visa and Mastercard shows.
PayPal's operating margins may never reach those levels, but they should be able to expand, even if the company only delivers modest growth in the near term.
That growth and its commitment to share buybacks should be enough for it to generate double-digit earnings-per-share growth. At the current valuation, that makes the stock a good bet to beat the market.
