Keeping It Simple

[eastunder]

PayPal's turnaround timeline catches investors off guard as company sees no FY24 EPS growth

12:47 PM ET, 02/08/2024 - Briefing.com

Rising competition in the payments space has taken a toll on fintech pioneer PayPal (PYPL), which has seen its revenue growth shrink to single digit levels in recent quarters as it loses share to companies like Apple (AAPL), Google (GOOG), and Affirm (AFRM). As such, expectations were muted heading into PYPL's Q4 earnings report with market participants focusing their attention on the future, looking for evidence that the turnaround plan from recently appointed CEO Alex Chriss is starting to take hold.

While PYPL comfortably exceeded those Q4 expectations with both EPS and revenue topping estimates, its weak guidance for FY24 indicated that a turnaround is going to take longer than anticipated. Specifically, the company said that it expects FY24 EPS to be about flat with FY23 at $5.10, falling well short of analysts' forecasts.

This discouraging guidance caught investors off-guard, especially after PYPL announced a 9% workforce reduction in late January. Costs, though, do not seem to be the issue. In fact, in Q4, total operating expenses were up by just 3% yr/yr to $6.3 bln. Rather, the main problem for PYPL is that its payment platform has fallen behind the curve, losing traction with consumers and businesses.

This is most clearly seen in the drop-off of branded transactions which are generated when consumers use the PayPal or Venmo app. These transactions are far more lucrative than unbranded transactions, or transactions that PYPL executes for businesses. A key metric that reflects this challenge is transaction margin dollars.

In Q4, transaction margin dollars were flat on a yr/yr basis at $3.7 bln and PYPL doesn't see this improving much in FY24. During the earnings call, the company said that it expects transaction margin dollars to remain flat this year on a yr/yr basis. Adding salt to the wound, Mr. Chriss acknowledged that the product improvement initiatives he highlighted during his "First Look" presentation on January 25 are not likely to move the needle much in FY24.

According to Mr. Chriss, the initial customer reaction to these product enhancements, including a faster checkout experience and an AI-powered recommendation tool called Smart Receipts, has been encouraging, but it will take time for them to contribute meaningfully to the financials.

The main takeaway is that PYPL's disappointing FY24 guidance offered a sobering reality check that there is no quick fix to the company's turnaround. Keeping a tight lid on costs and enhancing the platform's capabilities is a sound strategy, but the stock seems likely to be stuck in neutral until some tangible evidence emerges that stronger growth lies ahead.