PayPal cuts earnings outlook, but stock gains with new targets seen as ‘achievable’

Shares of PayPal Holdings Inc. have taken a beating this year, but they rose about 4% in after-hours trading Wednesday even as the payment-technology company cut its full-year outlook and revoked its medium-term forecast in conjunction with its latest earnings report.

The outlook changes didn’t strike Wall Street as particularly surprising, as several analysts had mused headed into the latest earnings report that PayPal’s prior forecasts seemed too optimistic. The company is in the midst of a business transition, having announced on its prior report that it would focus less on absolute user growth as it worked to better engage its more valuable users, but Chief Executive Dan Schulman called out macroeconomic factors in discussing the lowered full-year forecast.

“It is clear that relative to early February, the macro environment has deteriorated,” he said on the earnings call. “Russia, Ukraine and China are contributing to increased global uncertainty and incremental inflationary and supply-chain pressures, and more specifically to PayPal, forecasting normalized consumer e-commerce spending as we come out of the pandemic is exceedingly complex.”

John Rainey, the company’s outgoing chief financial officer who is leaving for Walmart Inc. WMT,
-0.68%
next month, added that rising inflation is something “disproportionately affecting our customer base that skews more towards discretionary spend versus nondiscretionary spend.”

The company now expects revenue growth of 11% to 13% on the year, equating to $ 28.16 billion to $ 28.67 billion. PayPal also anticipates $ 3.81 to $ 3.93 in adjusted EPS, and well as about 10 million net new active accounts.

Its prior forecast, issued with its December-quarter earnings report, was for 15% to 17% revenue growth, $ 4.60 to $ 4.75 in adjusted EPS, and 15 million to 20 million net new active accounts. The FactSet consensus was for $ 29.26 billion in revenue and $ 4.62 in adjusted EPS.

Schulman said on the earnings call that investors “expect more” from PayPal than what they have seen in recent quarters, something he was taking “full accountability” for.

“Navigating through the pandemic and an uncertain macroeconomic environment with resulting shifts in consumer behavior has made visibility more challenging, but we need to do better,” he continued.

While outlook cuts are never ideal, analysts were wondering whether the reset at PayPal could serve as a “clearing event,” helping to lower the risks of investing in a stock that had expectations out of line with reality.

“We see investors coming back to the story after the clearing event in Q1, with targets now set in a more achievable (even conservative) spot,” wrote Barclays analyst Ramsey El-Assal.

Though PayPal lowered its revenue outlook by more than what Wolfe Research analyst Darrin Peller had been expecting, he wrote that he thought the move “will ultimately be received well by investors given the perception that numbers may finally be fully de-risked.”

PayPal cited a changing macroeconomic climate while presenting its new outlook, a day after Visa Inc. V,
+ 6.47%
executives said they weren’t seeing negative spending trends related to factors like inflation or the Ukraine war within their own business. Mizuho analyst Dan Dolev was doubtful that macro factors were the root of PayPal’s lowered forecast.

“Sometimes misexecution is just misexecution,” he told MarketWatch.

Dolev is bullish on PayPal, and with its stock so beaten down, he suggested that part of the bull case is an expectation that PayPal’s management team has swung from being far too optimistic about business trends to now being overly pessimistic.

“At the height of COVID, they extrapolated that COVID singularity just basically continues into infinity,” he said. “The hope now is they’re looking at the post-COVID hangover and extrapolating too much downside, because that means it’s beatable,” he said.

PayPal’s stock was inching up in late trading Wednesday likely amid a belief that its current price factors in too many fears, Dolev continued.

The latest changes to PayPal’s outlook overshadowed its first-quarter results, which brought slight upside on revenue and user growth.

PayPal’s revenue climbed to $ 6.5 billion from $ 6.0 billion a year prior, while analysts tracked by FactSet had been looking for $ 6.4 billion. It had 429 million active accounts as of the March quarter, compared with 426 million as of the December quarter and 392 million as of the March quarter prior. Analysts surveyed by FactSet were modeling 428.4 million active accounts.

The company posted first-quarter net income of $ 509 million, or 42 cents a share, down from $ 1.1 billion, or 92 cents a share, in the year-earlier period. On an adjusted basis, PayPal earned 88 cents a share, down from $ 1.22 a share a year earlier and flat with the FactSet consensus, which was for 88 cents a share.

PayPal generated $ 323 billion in total payment volume in its latest quarter, up from $ 285 billion a year earlier and even with the FactSet consensus, which was for $ 323 billion.

For the June quarter, PayPal expects adjusted earnings per share of about 86 cents on revenue of roughly $ 6.8 billion. Analysts were expecting $ 1.12 in adjusted EPS and revenue of $ 7.1 billion.

PayPal’s stock has fallen more than 50% in 2022.

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