PayPal Struggles to Assuage Investor Concerns Despite Positive Earnings Report
- Wednesday, October 16, 2024
PayPal Holdings Inc. is facing scrutiny from investors as it addresses certain areas of its business, causing wavering confidence in the company's performance.
Following the release of PayPal's second-quarter earnings report, analysts observed positive aspects such as strong revenue performance and indications of accelerated July metrics. Despite these promising signs, concerns over transaction and adjusted operating margins dampened investor sentiment, resulting in an 8% drop in stock value during premarket trading on Thursday.
Susquehanna analyst James Friedman noted the positive revenue and volume results but expressed apprehension regarding the unexpected decline in Credit, which hindered margin expansion. He did, however, commend PayPal executives for their clear and focused presentation on the unbranded (Braintree) product. Nonetheless, the softened Credit raises further concerns about margins. Friedman maintains a neutral rating on PayPal's stock with a target price of $78.
One crucial metric catching the attention of Wall Street investors is PayPal's transaction gross profit. According to Bernstein analyst Harshita Rawat, this metric serves as a pivotal indicator of the company's overall health. While total payment volume can be impacted by businesses with varying gross margins, transaction gross profit presents a more accurate assessment.
Despite positive earnings figures, PayPal continues to face challenges in reassuring jittery investors who remain cautious about the company's performance moving forward.
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PayPal, a leading online payment service, experienced what industry experts like Rawat describe as "very weak" growth in "clean" transaction gross profit during the latest quarter. While the total payment volume (TPV) increased by 11%, the metric for clean transaction gross profit only rose by 1%.
Rawat's analysis highlights concerns around market share, persistent negative dynamics in gross profit, and the lack of visibility regarding CEO succession. This cautious outlook leads her to maintain a market-perform rating and a target price of $70 for PayPal.
Mayank Tandon from Needham draws attention to the growing prominence of PayPal's unbranded checkout business, a segment that is putting pressure on profit margins. While Tandon acknowledges positive factors such as a robust third-quarter outlook and progress in cost management, he believes that the shift towards lower-margin unbranded revenue could limit the impact of cost initiatives. Furthermore, Tandon suggests that sustaining growth through these channels may become challenging due to narrower competitive advantages.
Similarly, John Davis of Raymond James observes positive trends, including an acceleration in July. However, Davis remains cautious about the transaction-margin situation. He expresses ongoing concerns about the decline in net-new additions, which have decreased by 2 million sequentially for two consecutive quarters and are projected to decline further in the second half of the year. Davis's lack of confidence in PayPal's growth algorithm and potential limitations in gross-profit growth prompt him to adopt a wait-and-see approach.
Despite encouraging aspects like an optimistic third-quarter outlook and progress in cost management, analysts remain wary of PayPal's ability to maintain long-term growth and overcome challenges in gross-profit dynamics and market share.
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