PayPal Holdings Inc - Resilient consumer spending

4 Aug 2023
  • 1H23 revenue/PATMI was within expectation at 49%/48% of our FY23e forecasts. In 2Q23, revenue grew 7% YoY to US$3bn led by 11% YoY increase in total payment volume benefiting from resilient consumer spending.
  • In 2Q23, gross margin fell to 46% from 49% in 2Q22 due to volume mix shift towards the lower-margin Braintree unit and 65% YoY spike in credit loan provisions to US$112mn.
  • For FY23e, PayPal reiterated its adj. EPS guidance to grow 20% YoY to US4.95 and 100 basis points YoY improvement in adj. operating margin to 22% driven by higher operating leverage. GAAP EPS guidance raised to US$3.49 from US$3.42.
  • We maintain a BUY recommendation with a lower DCF target price of US$98.00 (prev. US$103.00) using a WACC of 7% and terminal growth rate of 4%. Our FY23e revenue estimates remain unchanged, while we nudge lower our EBITDA by 2% due to higher transaction-related expenses and credit loan provisions. PayPal enjoys long-term tailwinds from two-sided network effects, secular shift to electronic payments, as well as Venmo monetization initiatives like Tap to Pay and payment option on Amazon.

 

 

The Positives

+ Transactions per active account continued to climb. PayPal’s customer engagement as measured by the number of transactions per active user increased to 55x in2Q23 from 49x in 2Q22. The management has shifted its strategy to driving more engagement within existing users away from trying to grow active users. PayPal is boosting user engagements through new features, including Tap to Pay on iPhone, cryptocurrency buying and selling, and QR code payments. Moreover, PayPal’s Venmo (popular peer-to-peer payment platform) has been added as a payment option on Amazon’s checkout page.

 

+ Double-digit growth in total payment volume. In 2Q23, PayPal’s total payment volume (TPV) surged by 11% YoY to US$377bn driven by resilient consumer spending. Management highlighted that e-commerce spending is expected to grow by mid-single digits YoY in FY23e compared with its prior expectation of flat growth as there appears to be shift from travel and services to goods spending.

 

The Negative

– Active account growth slows, continuation of gross margin compression. In 2Q23, active accounts grew by 0.5% YoY to 431mn but decreased by 2mn sequentially due to higher churn from lower usage accounts. In addition, the gross margin fell to 46% in 2Q23 from 49% in 2Q22. The drop was mainly due to both the volume mix shift towards the lower-margin Braintree unit and higher loan provisions. In 2Q23, credit losses spiked by 65% YoY to US$112mn. Management highlighted that the company has tightened its underwriting standards for business loans offered to merchants.

About the author

Ambrish Shah
US Technology Analyst (Software/Services)
PSR

Latest Reports

Join Events & Seminars

Learn best practices and latest market outlook from experts and special guests

Hear & Ask our Experts

Join live weekly market calls

Read Popular News & Reports, Technical Pulses

at www.stocksbnb.com

Subscribe to our YouTube Channel

New video every week

Contact us to Open an Account

Need Assistance? Share your Details and we’ll get back to you

IMPORTANT INFORMATION

This material is provided by Phillip Capital Management (S) Ltd (“PCM”) for general information only and does not constitute a recommendation, an offer to sell, or a solicitation of any offer to invest in any of the exchange-traded fund (“ETF”) or the unit trust (“Products”) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. You should read the Prospectus and the accompanying Product Highlights Sheet (“PHS”) for key features, key risks and other important information of the Products and obtain advice from a financial adviser (“FA“) pursuant to a separate engagement before making a commitment to invest in the Products. In the event that you choose not to obtain advice from a FA, you should assess whether the Products are suitable for you before proceeding to invest. A copy of the Prospectus and PHS are available from PCM, any of its Participating Dealers (“PDs“) for the ETF, or any of its authorised distributors for the unit trust managed by PCM.  

An ETF is not like a typical unit trust as the units of the ETF (the “Units“) are to be listed and traded like any share on the Singapore Exchange Securities Trading Limited (“SGX-ST”). Listing on the SGX-ST does not guarantee a liquid market for the Units which may be traded at prices above or below its NAV or may be suspended or delisted. Investors may buy or sell the Units on SGX-ST when it is listed. Investors cannot create or redeem Units directly with PCM and have no rights to request PCM to redeem or purchase their Units. Creation and redemption of Units are through PDs if investors are clients of the PDs, who have no obligation to agree to create or redeem Units on behalf of any investor and may impose terms and conditions in connection with such creation or redemption orders. Please refer to the Prospectus of the ETF for more details.  

Investments are subject to investment risks including the possible loss of the principal amount invested. The purchase of a unit in a fund is not the same as placing your money on deposit with a bank or deposit-taking company. There is no guarantee as to the amount of capital invested or return received. The value of the units and the income accruing to the units may fall or rise. Past performance is not necessarily indicative of the future or likely performance of the Products. There can be no assurance that investment objectives will be achieved.  

Where applicable, fund(s) may invest in financial derivatives and/or participate in securities lending and repurchase transactions for the purpose of hedging and/or efficient portfolio management, subject to the relevant regulatory requirements. PCM reserves the discretion to determine if currency exposure should be hedged actively, passively or not at all, in the best interest of the Products.  

The regular dividend distributions, out of either income and/or capital, are not guaranteed and subject to PCM’s discretion. Past payout yields and payments do not represent future payout yields and payments. Such dividend distributions will reduce the available capital for reinvestment and may result in an immediate decrease in the net asset value (“NAV”) of the Products. Please refer to <www.phillipfunds.com> for more information in relation to the dividend distributions.  

The information provided herein may be obtained or compiled from public and/or third party sources that PCM has no reason to believe are unreliable. Any opinion or view herein is an expression of belief of the individual author or the indicated source (as applicable) only. PCM makes no representation or warranty that such information is accurate, complete, verified or should be relied upon as such. The information does not constitute, and should not be used as a substitute for tax, legal or investment advice.  

The information herein are not for any person in any jurisdiction or country where such distribution or availability for use would contravene any applicable law or regulation or would subject PCM to any registration or licensing requirement in such jurisdiction or country. The Products is not offered to U.S. Persons. PhillipCapital Group of Companies, including PCM, their affiliates and/or their officers, directors and/or employees may own or have positions in the Products. Any member of the PhillipCapital Group of Companies may have acted upon or used the information, analyses and opinions herein before they have been published. 

This advertisement has not been reviewed by the Monetary Authority of Singapore.  

 

Phillip Capital Management (S) Ltd (Co. Reg. No. 199905233W)  
250 North Bridge Road #06-00, Raffles City Tower ,Singapore 179101 
Tel: (65) 6230 8133 Fax: (65) 65383066 www.phillipfunds.com