What to look out for (e.g. better profit margin) in PayPal Holdings (PYPL) Earnings Report?

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$PayPal(PYPL)$ will start a busy week of corporate earnings reports on 08 May 2023 after the market close.

PayPal did not give guidance for 2023, reason being with cross-border trade declining and macroeconomic conditions continuing to have an impact,

They have seen successes for its buy now, pay later (BNPL) offering, as well as transaction and payment volume growth (albeit at a much slower rate than last year).

However, the company did predict a 7.5% YoY revenue increase in Q1 2023, including a 150-bps headwind from FX changes.

These are some key notes from the last earning reports:

Less Focus on Customer Accounts Growth

PayPal will focus less on growing customer accounts—one of its previous core goals—and more on cost restructuring so it can allocate more funds toward high-growth initiatives.

There are other similar fintech, like Affirm, who are also deploying the same strategies.

Cost Cutting Through Layoffs

PayPal will let go of about 2,000 employees, or roughly 7% of its global workforce, this month. This will help the company save about $600 million, on top of the $1.3 billion in savings it’s already achieved, Schulman said during the earnings call.

It will invest these savings in “high-conviction” projects like password less checkout, one-click in-app experiences, and supporting advanced checkout flows with data and AI capabilities.

Digital Wallet Build Out

PayPal wants to build out its digital wallet and strengthen its peer-to-peer (P2P) payments value proposition by streamlining customer onboarding and reducing payment declines. It will also expand its unbranded checkout offerings, like the PayPal Commerce Platform.

Let us look at some of PayPal Fundamental Statistics

Financial Position

PayPal's short term assets ($57.5B) exceed its short term liabilities ($45.1B). This would mean PayPal is able to have enough cash flow to provide for its short term programs.

This would be pretty beneficial to PayPal as they would need that for the Buy Now Pay Later.

PayPal's long term assets ($21.20B) exceed its long term liabilities ($13.3B), this would be more for its digital wallet program, as this would be a long term project to boost the company competitive advantage.

Earnings and Revenue History

PayPal has high quality earnings. But in Q4 2022, the net profit margins (8.8%) is lower than 2021 (16.4%).

Last Q1 2022, the profit margin is 13.9%, I do not think PayPal would be able to exceed it.

The net profit margin for Q1 2023 might be around 9.5-10.5%. Considering they are able to save some costs from their layoffs exercise.

Future Return on Equity (ROE)

PayPal's Return on Equity is forecast to be high in 3 years time (23.8%).

ROE is expected to grow by 23.8% per year.

Earnings per Share Growth Forecasts

Earnings per Share is expected to grow by 19.7% per year.

What we need to look out for is whether they can maintain the upward trend as forecast.

Price Performance After Last Earning Report

PayPal has traded lower after its announced earnings report which give investors some uncertainty of what it hope to do in 2023.

We understand that they have planned for a layoffs to cut costs so that they could build on their innovative projects, but it does not seem to help the stock price since the last earning report on 09 Feb 23.

It could be due to the cross border FX challenges which might have impact their overall performance.

I believe what is needed from 08 May Earning Report would be a STRONG showing on the Buy Now Pay Later program, how well have it been doing?

I believe investors would also look forward to the digital wallet that PayPal has planned to build to enhance its competitive edge among the other large payment provider players.

PayPal has hint that they will not be focusing on more customer acquisition after Q4 2022, so it would not be a surprise if we do not see more active and verified users onboarded.

What would move the Stock Price Up after earning report?

I would expect to see better revenue from Buy Now Pay Later and how much cost was saved and deployed onto the digital wallet program.

What would be also important is how they are managing the FX challenges especially with the interest rate hike in the Q1 2023. There would be some impact to the FX as well.

Summary

I would pay attention to what the management would laid out plan for 2023, and also how the revenue and margin have adjusted based on what they have planned to do when they announced in Feb 2023.

PayPal could trade upward if there is positive feedback from their Buy Now Pay Later, an increase of the forecast 7.5% Year On Year revenue increase.

And an increase and better profit margin would certain helps PayPal.

Appreciate if you could share your thoughts in the comment section on what do you think of the items to look out in PayPal earnings report on 08 May 23?

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Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.