What happened
Through the close of trading Thursday, shares of PayPal Holdings (PYPL 2.90%) were down 13% week to date, according to data provided by S&P Global Market Intelligence.
The stock's decline was driven by the quarterly report the company delivered Wednesday. PayPal reported another quarter of revenue and profit growth, but investors saw signs that it's suffering from competitive pressure.
So what
For the second quarter, PayPal reported a non-GAAP (adjusted) operating margin of 21.4%, which was an improvement of a few percentage points compared to the year-ago quarter, but slightly below management's previous guidance. The margin miss was attributed to PayPal's credit portfolio, where management increased its loss provisions and realized less revenue than expected.
The margin performance highlights a problem analysts have been concerned about this year, which is that the company is seeing lower growth from high-margin branded checkout payments, including PayPal's credit and debit products. However, management pointed out that branded checkout is accelerating.
Also raising concerns about the company's competitive position was its slight dip in active customer accounts. For the second quarter in a row, PayPal reported a 2 million decrease in active accounts.
Overall, PayPal is not growing its top line fast enough to give investors confidence in its growth prospects, even though the stock is trading at a cheap valuation of just 13 times this year's earnings estimate.
Now what
PayPal is still reporting solid growth on the bottom line: Adjusted earnings per share increased by 24% year over year. But the market is more concerned about the loss of customer accounts and the health of PayPal's credit portfolio.
Increasing competition in the digital payments landscape could be causing PayPal to lose market share. The company's single-digit percentage growth rates are well below its pre-pandemic levels of growth. Investors should be cautious with the stock until these trends reverse.
