Why Is Paypal (PYPL) Down 12.7% Since Last Earnings Report?

It has been about a month since the last earnings report for Paypal (PYPL). Shares have lost about 12.7% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Paypal due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

PayPal's Q1 Earnings Match Estimates

PayPal Holdings reported non-GAAP earnings of 88 cents per share in first-quarter 2022, in line with the Zacks Consensus Estimate. Further, the figure declined 28% on a year-over-year basis and 20.7% from the prior quarter.

Net revenues of $6.5 billion exhibited year-over-year growth of 8% on an FX-neutral basis and 7% on a reported basis. Further, the figure surpassed the Zacks Consensus Estimate of $6.42 billion.

However, the top line decreased 6.3% sequentially.

Growing transaction and other value-added services’ revenues drove year-over-year revenue growth in the reported quarter. Also, accelerating U.S. revenues contributed well.

The strong performance by Venmo was another positive. The growing total payment volume (“TPV”), courtesy of increasing net new active accounts, drove the results.

However, declining international revenues were concerning.

Top Line in Detail

By Type: Transaction revenues amounted to $5.9 billion (93% of net revenues), up 7% from the year-ago quarter. Other value-added services generated revenues of $485 million (accounting for 7% of net revenues), up 18% year over year.

By Geography: Revenues from the United States totaled $3.7 billion (57% of net revenues), up 20% on a year-over-year basis. International revenues were $2.8 billion (43% of revenues), down 5% from the prior-year quarter.

Key Metrics to Consider

PayPal witnessed year-over-year growth of 9% in total active accounts, with 2.4 million net new active accounts in the reported quarter. The total number of active accounts was 429 million in the quarter under review.

The total number of payment transactions was 5.2 billion, up 18% on a year-over-year basis.

The company’s payment transactions per active account were 47 million, which improved 11% from the year-ago quarter.

TPV amounted to $322.98 billion for the reported quarter, reflecting year-over-year growth of 13% on a spot rate basis and 15% on a currency-neutral basis.

Notably, year-over-year growth in TPV was primarily driven by robust Venmo, which accounted for $57.8 billion of TPV, rising 12% on a year-over-year basis.

Operating Details

PayPal’s operating expenses were $5.8 billion in the first quarter, up 15.6% from the prior-year quarter. As a percentage of net revenues, the figure expanded 630 basis points (bps) on a year-over-year basis.

Non-GAAP operating margin was at 20.7%, contracting 700 bps from the year-ago quarter.

Balance Sheet & Cash Flow

As of Mar 31, 2022, cash equivalents and investments were $7.9 billion, down from $9.5 billion as of Dec 31, 2021.

PayPal had a long-term debt balance of $8.2 billion at the end of the first quarter compared with $8.05 billion at the end of the fourth quarter.

The company generated $1.2 billion of cash from operations, down from $1.8 billion in the previous quarter.

Free cash flow was $1.1 billion in the reported quarter compared with $1.6 billion in the prior quarter.

The company returned $1.5 billion to shareholders by repurchasing 11 million shares.

Guidance

For second-quarter 2022, PayPal expects year-over-year revenue growth of 9% on a current spot rate and a currency-neutral basis.

Non-GAAP earnings are expected to be 86 cents per share.

For 2022, PayPal has revised its guidance for year-over-year revenue growth to 11-13% on both spot rate and currency-neutral basis, which was previously pegged at 15-17%.

It revised non-GAAP earnings guidance downward from $4.60-$4.75 per share to $3.81-$3.93 per share.

TPV for 2022 is likely to exhibit growth of 13-15% on a spot rate basis and 15-17% on a currency-neutral basis. Previously, TPV growth was projected at 19-22% on a spot rate basis and 21-23% on an FX-neutral basis.

 

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision.

The consensus estimate has shifted -31.13% due to these changes.

VGM Scores

Currently, Paypal has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Paypal has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.

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