PayPal Holdings Inc. shares have taken a hit this year, but they are up about 4% after the close on Wednesday, even as the payments technology company lowered its full-year outlook and rescinded its medium-term guidance in conjunction with its latest earnings report.
The change in the outlook didn’t come as much of a surprise to Wall Street, as several analysts commented on the latest earnings report that PayPal’s earlier forecasts appeared overly optimistic. The company is in the midst of a business transition after announcing in its previous 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 cited macroeconomic factors in the equation Discussion of the reduction in the full-year forecast.
“It is clear that the macro environment has deteriorated compared to early February,” he said on the conference call. “Russia, Ukraine and China are contributing to heightened global uncertainty and rising inflation and supply chain pressures, and for PayPal specifically, forecasting normalized consumer e-commerce spending once the pandemic is over is extremely complex.”
John Rainey, the company’s outgoing chief financial officer, who is moving to Walmart Inc. WMT next month, -0.68%, added that rising inflation is something “that is disproportionately affecting our customer base and that tends to encourage discretionary spending rather than.” tends towards non-discretionary spending”.
The company now expects revenue to grow 11% to 13% for the year, which translates to $28.16 billion to $28.67 billion. PayPal also expects adjusted earnings per share to be in the range of $3.81 to $3.93 and about 10 million net new active accounts.
The previous guidance, which came with the December quarter earnings report, called for revenue growth of 15% to 17%, adjusted earnings per share of $4.60 to $4.75, and 15 to 20 million net new active accounts. The FactSet consensus was $29.26 billion in revenue and $4.62 in adjusted earnings per share.
Schulman said on the earnings call that investors are “expecting more” from PayPal than what they’ve seen over the past few quarters, for which he takes “full responsibility.”
“Navigating the pandemic and an uncertain macroeconomic environment with consequent shifts in consumer behavior has made visibility more difficult, but we must do better,” he continued.
While cuts in the outlook are never ideal, analysts wondered if PayPal’s reset could serve as a “clearing event” that could help reduce the risks of investing in a stock whose expectations don’t match reality.
“We’re seeing investors coming back to history after the clearing event in the first quarter, with targets now set in a more achievable (even conservative) place,” wrote Barclays analyst Ramsey El-Assal.
Although PayPal lowered its revenue outlook by more than Wolfe Research analyst Darrin Peller expected, he wrote that he thinks the move will “ultimately be well received by investors as they think the numbers could finally be completely risk-free”.
PayPal cited a changing macroeconomic climate when it presented its new outlook a day after Visa Inc. V. +6.47% of executives said they don’t see any negative spending trends related to factors like inflation or the war in Ukraine in their own company. Mizuho analyst Dan Dolev doubted macro factors were at the root of PayPal’s lowered guidance.
“Sometimes misexecution is just misexecution,” he told MarketWatch.
Dolev is bullish on PayPal, and with the stock so down, he suggested that part of the bull case is an expectation that PayPal’s management team has switched from being far too optimistic about its business to an overly bearish stance.
“At the height of COVID, they extrapolated that basically the COVID singularity just goes to infinity,” he said. “The hope now is that they look at the post-COVID hangover and extrapolate too many downsides because that means he’s beatable,” he said.
PayPal’s stock was higher in late trading on Wednesday, likely on a belief that the current price is harboring too many fears, Dolev continued.
PayPal’s recent changes to its outlook overshadowed its first-quarter results, which returned modest revenue and user growth.
PayPal’s revenue rose to $6.5 billion from $6.0 billion last year, while analysts tracked by FactSet were looking for $6.4 billion. It had 429 million active accounts in the March quarter, compared to 426 million in the December quarter and 392 million in the previous March quarter. Analysts polled by FactSet modeled 428.4 million active accounts.
The company reported net income of $509 million, or 42 cents a share, in the first quarter, compared to $1.1 billion, or 92 cents a share, in the year-ago period. On an adjusted basis, PayPal earned 88 cents per share, compared to $1.22 per share a year ago and flat to the FactSet consensus, which was 88 cents per share.
PayPal generated $323 billion in total payment volume last quarter, up from $285 billion a year ago and even including the FactSet consensus, which was $323 billion.
For the June quarter, PayPal expects adjusted earnings per share to be about 86 cents on revenue of about $6.8 billion. Analysts were expecting adjusted earnings per share of $1.12 and revenue of $7.1 billion.
PayPal stock is down more than 50% in 2022.