- Investors spooked by growing pressure on profit margins
- Analysts concerned losing digital payments market share
- Worries offset Q1 forecasts beat
Digital payments firm PayPal (PYPL:NASDAQ) is facing nearly $3.5 billion being wiped off its market value when trading reopens in New York later today.
The near-5% plunge in the share price of the Palo Alto-based business came after cutting growth guidance for its operating profit margins for the full year (to 31 Dec), overshadowing forecast beats for the first quarter.
PayPal expects adjusted operating margin expansion of 100 basis points this year, compared with its earlier forecast of a 125-basis-point growth.
Investors are assuming that the company’s branded checkout button, a high margin business, isn't doing as well as people thought it was and the fear is that it’s losing market share to Apple, Dan Dolev, an analyst at Mizuho told Reuters.
HOW Q1 PLAYED OUT
In the January to March 2023 quarter, PayPal announced EPS (earnings per share) of $1.17 on revenue of $7.04 billion, ahead of consensus estimates. Analysts polled by Investing.com anticipated EPS of $1.10 on revenue of $6.98 billion.
The beat on the bottom line was driven by cost cuts and an increase in new accounts. Active accounts grew 1% for the quarter year-on-year, bringing total active accounts to 433 million. Total payment volume (TPV), a key measure of performance, rose 10% to $354.5 billion.
PayPal sees Q2 adjusted EPS growing between 24% and 26%, implying $1.15 to $1.17, on revenue growth in a range of 6.5% to 7%.
Looking ahead, the company now expects to grow adjusted EPS by about 20% for the 12 months to $4.95, up from prior guidance of 18% growth to $4.87. The company attributed the boost to guidance to the ‘ongoing benefit from cost initiatives.’
ANALYST CONCERNS
Oppenheimer analyst Dominick Gabriele believes PayPal stock ‘may be stuck’ in the near term.
‘Revenue growth is likely slower than TPV. We/investors need to see sustainable underlying margin expansion given its scale,’ Gabriele said in a client note.
Deutsche Bank analyst Bryan Keane said the sharp move lower in PayPal shares is a result of the investor focus on transaction margin pressures.
‘Transaction margins are under pressure and will only begin to improve year-on-year if branded volumes rebound (as share loss worries continue). As a result, we expect higher revenues to be fully offset by lower transaction margins,’ Keane wrote.
