What happened

PayPal Holdings (PYPL -2.62%) saw its stock fall 14.4% this week, as of Friday's opening bell, according to S&P Global Market Intelligence. The payments specialist was trading at about $64 per share, down 9.9% year to date.

So what

PayPal sank following the release of Q1 earnings results on Monday, but at first glance, it's not clear why. The payment company had a solid quarter, beating earnings estimates and boosting profit projections for the full fiscal year.

Total payment volume grew 10% year over year to $354 billion, while net revenue was up 9% to $7 billion. Operating income rose 41% year over year to $1 billion, while earnings jumped 61% to $0.70 per share.

In addition, PayPal raised its guidance for Q2 and fiscal year 2023 based on first-quarter momentum and the success of its cost-cutting initiatives. Revenue is expected to increase 6.5% to 7% in the second quarter, while EPS is forecast to come in at $3.42 at the end of fiscal 2023, up from EPS of $2.09 in 2022.

However, several analysts lowered their price targets for PayPal, primarily due to projections of lower operating margin expansion than previously anticipated. Specifically, non-GAAP operating margin is anticipated to increase 100 basis points this year, as opposed to the previous expectation of 125 basis points.

Now what

The company said the reduced guidance reflects its unbranded processing volume contributing more to growth. The unbranded processing business is its merchant processing arm, which operates through platforms like PayPal Braintree and PayPal Complete Payments. While growing, it is a lower-margin segment than its payment business.

"The fact that Braintree is doing better than we expected, I see how that's weighing on people's thoughts right now. But I'd much prefer Braintree to be doing well than not be doing well, given all the strategic reasons for that and the fact that we expect we'll add incremental margins on it," CEO Dan Schulman said on the earnings call. "So yes, [unbranded growth is] higher than we thought, and that's putting some pressure [on margins], but that over time is a benefit to us."

Overall, PayPal plans to reduce this margin drag by expanding unbranded products and cross-selling services, so it seems like a minor concern. PayPal remains a good bargain right now with a forward price-to-earnings ratio of just 13.