PayPal Earnings: The Market Is Worried, But Long-Term Investors Should Not

seekingalpha04:05

The initial market reaction to PayPal's Q3 2024 results seems justified based on next quarter's guidance.The Q4 guidance aside, active users are back to growth on a quarterly basis, and margins ...

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(NASDAQ:PYPL) just reported its third quarter earnings and the initial market reaction is one of disappointment. The stock was down by nearly 7% in the trading hours, and it appears that investors are not happy with the 3-month performance. Earnings were roughly in-line with consensus estimates, but the slight miss in revenues, higher than-expected costs and the somehow disappointing guidance for the next quarter took their toll on the share price. As a matter of fact, it appears that the Q4 2024 guidance is what caught the market off-guard as PayPal's management now expects \"low single-digit growth\" in revenues and Non-GAAP EPS within the range of $1.07 to $1.11, which is a notable decline from the Non-GAAP EPS just reported of $1.20. Moreover, when we compare the current guidance to the one for the fourth quarter of 2023 that was provided a year ago, it becomes clear why short-term investors are so disappointed by the current earnings release. PayPal Investor Presentations Even though the aforementioned results could explain the sharp fall of PYPL today, in a similar fashion to my first article on PYPL back in early 2023, I am still convinced that panicking as a result of quarterly trends and narratives is not a viable strategy for investing. For example, the negative sentiment around PYPL was quite high in early 2023 and yet, the stock went on to outperform Block, Inc. (SQ), Visa Inc. (V) and Mastercard Incorporated (MA). Data by YCharts It appears that this trend could change temporarily in the very near-term as investors digest the somehow lower-than-expected management expectations about the next 3-month period, but I don't see a reason for long-term investors to reconsider their view on PYPL. A Closer Look One of the big positives during the quarter was the year-on-year growth in active accounts. After active accounts fell by 2% in fiscal year 2023, investors have become worried that this is just the start of a trend. This was happening during a period of time of strong economic activity and significant growth for PayPal's peers which only added fuel to the fire. PayPal Investor Presentation As the narrative that PYPL is likely to shrink in size continued to spread in 2024, it appears that we are finally back to quarterly growth in active accounts. On a year-on-year basis, they fell by 1% in Q1 of 2024, stayed flat in the second quarter and are now up by 1% from a year ago. PayPal Investor Presentations As a consequence, total payment volume continues to improve and with that PayPal's operating margin now stands at a record high as economies of scale kick in. prepared by the author, using data from earnings releases We should note that year-on-year growth in TPV has been declining and now stands at around 9%. prepared by the author, using data from earnings releases This, however, is expected as inflation cools off and annual changes in consumption expenditures revert to historical norms (see the graph below). FRED As I recently noted, the risk of economic slowdown is significant and should not be ignored by investors in cyclical stocks like PayPal. This issue, however, has implications for overall portfolio construction and based on everything said above PYPL seems to be in a good position to continue outperforming its peers over coming years. At What Price? Even though PYPL's share price could be severely impacted in an event of a recession in 2025, the stock is still priced attractively relatively to its business fundamentals and its competitors within the expanded peer group. The sharp increase in equity valuations over the past year or so is a major risk when looking at PYPL potential returns on an absolute basis. However, as we will see down below, the stock remains reasonably priced which limits future downside risk. Data by YCharts One way of looking at things is comparing PayPal's quarterly revenue growth to the company's Price/Earnings ratio on a Non-GAAP basis. In that regard, PYPL appears to be running ahead of fundamentals at least in the short term as quarterly revenue growth fell below 6% during the last quarter, but the Non-GAAP P/E is at its highest levels since early 2023. prepared by the author, using data from earnings releases The graph above, however, tells us very little about future growth expectations and nothing about PayPal's profitability, which as we saw above, has improved considerably in recent quarters. Moreover, PYPL also trades at one of the lowest P/E multiples within its peer group, with only Fidelity National Information Services, Inc. (FIS) having a lower multiple. prepared by the author, using data from Seeking Alpha Things are even better when we look at PayPal's free cash flow, which continues to increase at a higher rate than the share price. As we can see from the extract below, the company's cash flow from operations has more than doubled over the first nine months of 2024 when compared to the same period a year ago. This is due to the net impact between originations and repayments of loans, which had a negative impact of roughly $2bn in the first nine months of 2023. In comparison, the net impact is now close to zero as proceeds from repayments have caught up with the initial capital outlays. PayPal Earnings Release As a result, PayPal's free cash flow has improved considerably and the stock now trades at a record-high free cash flow yield of more than 8%. prepared by the author, using data from SEC Filings and Seeking Alpha Conclusion  Despite the market's negative reaction to PayPal's most recent quarter, the stock remains an attractive long-term buy. Although the daily share price drop is justified on the basis of the somehow disappointing guidance, the company's improving profitability and the stock's attractive valuation are what long-term investors should be focused on.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"1","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2479264431"}