PayPal Shares Decline on Weak Q4 Revenue Outlook
PayPal (NASDAQ:PYPL) Holdings Inc. shares fell by 5% following the announcement of fourth-quarter revenue forecasts that fell short of analyst expectations. The company is shifting away from aggressive expansion under the leadership of CEO Alex Chriss, focusing instead on higher-margin businesses. Since taking office last year, Chriss has emphasized cost discipline through workforce reductions and increased investments in automation and artificial intelligence.
CFO Jamie Miller acknowledged the challenges ahead during a post-earnings call with analysts, stating, "Change takes time, and there is still much work to be done, but the team is already making steady progress on a solid foundation." PayPal is recalibrating its growth strategy by shrinking in low-margin segments like Braintree, which provides payment technology to businesses, while concentrating on more profitable areas like branded payment services.
The company forecasts a "low single-digit" percentage increase in revenue for the fourth quarter, which falls short of the 5.4% growth estimate by analysts surveyed by LSEG. Miller described this as a deliberate decision in line with the year's strategy, emphasizing that the short-term lower revenue profile from Braintree was accepted in favor of improved profit margins.
Despite the weak revenue forecast, PayPal's third-quarter performance showed resilience, with revenue rising 6% to $7.85 billion, slightly below the $7.89 billion estimate. The company raised its 2024 profit outlook for the third time this year, citing a strong consumer spending environment. Excluding one-time items, earnings per share are expected to rise from previously forecasted "low to mid-teens" percentages to "high-teens" percentages for 2024.
In the third quarter, adjusted profits rose 14% to $1.23 billion, and earnings per share increased to $1.20 compared to 98 cents in the same period last year. With PayPal's share price at $79.25, it could experience its largest intraday drop since February if the downward trend continues throughout the trading session.
Amid these developments, PayPal is actively forming and expanding partnerships in the retail and payments sector, contributing to a 36% increase in its stock this year, outperforming the S&P 500 index. The company also launched a "one-click" payment feature called Fastlane in January. Analysts note that these long-term initiatives may take time to significantly impact the company's financial metrics.
PayPal's operating margins have improved, increasing by 194 basis points to 18.8% in the third quarter, a key indicator for investors monitoring the company's financial health. In comparison, investment firm William Blair described smaller competitor Block as "a more attractive way for investors to participate in software-integrated point of sale."