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PayPal (PYPL) Earnings Preview: An Update on the Company's "Transformation" Process

Jay's InsightMonday, Oct 28, 2024 12:23 pm ET

2min read

PYPL --

PayPal Holdings, Inc. (PYPL) is set to release its third-quarter financial results tomorrow before the market opens, followed by an earnings call at 8:00 am ET. Investors and analysts are closely watching the company's performance during what has been labeled a transition year, with uncertainty remaining relatively elevated.

Earnings Expectations and Stock Performance

The current consensus among analysts is for PayPal to report adjusted earnings per share (EPS) of $1.07, representing an 18% year-over-year decline. Revenue is expected to come in at $7.88 billion, marking a 6% increase compared to the same quarter last year. Despite the anticipated drop in EPS, PayPal expects its third-quarter EPS growth to be in the high single digits.

The company's stock has shown a healthy upward trend, reaching fresh 52-week highs. Year-to-date, PayPal shares have gained over 35%, with approximately a 30% increase since the release of its second-quarter results in late July. This upward momentum reflects renewed investor interest following several highlights from the previous quarter.

Ongoing Transformation and Growth Initiatives

A significant driver of PayPal's recent performance has been its early success in an ongoing transformation focused on high-quality, profitable growth. In the second quarter, the company returned to delivering earnings upside after a rare miss, surpassing revenue expectations. PayPal also raised its full-year 2024 guidance and announced plans to repurchase $6.0 billion worth of its shares, an increase of $1.0 billion, fueled by robust free cash flow generation.

Despite these positive developments, PayPal acknowledges that there is still room for improvement. The company's shares are trading over 70% below their all-time highs reached in 2021. Management has noted that the turnaround efforts are still underway and that the transition year will likely result in lower volume and revenue growth in the latter half of the year.

Several critical areas could influence PayPal's growth potential and investment value:

1. Branded Checkout: PayPal's branded checkout offering showed decent profitability growth in the last quarter. The company's redesigned payment page led to a year-over-year conversion rate increase of 75 to 110 basis points, indicating improved customer engagement and transaction efficiency.

2. PayPal Complete Payments Platform (PPCP): Launched last year and primarily serving small and medium-sized businesses, PPCP continued its upward momentum with a 40% volume increase through the first half of 2024. This growth underscores PayPal's expanding footprint in the SMB segment.

3. Venmo: Total Payment Volume (TPV) for Venmo, a crucial metric for the platform, edged up by 8% year-over-year in the last quarter. Additionally, monthly active users grew by 5%, highlighting steady user engagement and adoption.

Competitive Landscape

Competition remains a significant factor for PayPal. Tech giants like Apple (AAPL) and Google (GOOG) are strengthening their payment solutions, potentially challenging PayPal's market share. However, company management reported last quarter that they have not observed any degradation in market share over the past four years, despite increased competition and enhanced offerings from existing players.

Investor Considerations

With PayPal's stock trading at one-year highs, much of the positive news may already be reflected in the current share price. To sustain this momentum and avoid a potential sell-the-news reaction, PayPal will need to deliver another quarter of noticeable improvements and meet or exceed market expectations.

Investors should be mindful that 2024 is considered a transition year for PayPal. The company has cautioned that volatility is expected, and success in one quarter does not guarantee continued performance in subsequent periods. As such, the upcoming earnings report will be crucial in assessing whether PayPal's strategic initiatives are yielding tangible results.

Conclusion

PayPal's upcoming third-quarter earnings release comes at a pivotal time as the company navigates its ongoing transformation. While there are encouraging signs of progress, including stock price recovery and growth in key business areas, challenges remain. The company's ability to execute its strategies effectively amid heightened competition and market uncertainties will be central to its growth potential and attractiveness as an investment. Investors should closely monitor the earnings report and management's commentary for insights into PayPal's future trajectory.

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