Earnings preview: PayPal will look to regain investor trust amid a strategy change and CFO transition
After losing more than half its value so far this year, PayPal Holdings Inc. still faces ‘uncertainty’ from Wall Street.
PayPal PYPL, +2.03% was an investor darling in the early days of the COVID-19 crisis, as the payment-technology company benefited from sharp growth in online commerce as well as consumer stimulus programs that could send money straight to digital wallets such as PayPal-owned Venmo. But the company warned of some spending pressures and announced a change to its user-growth strategy when it last delivered earnings in February, moves that rattled Wall Street’s confidence.
Analysts seem fairly cautious heading into PayPal’s coming report, due also to a recently disclosed management transition. PayPal said earlier this month that Chief Financial Officer John Rainey would step down in late May to take on the same role at Walmart Inc. WMT, +0.05%, and several analysts flagged that the company didn’t reiterate its outlook when announcing Rainey’s departure.
“One thing is certain: The lack of a guidance update will create more uncertainty into 1Q than the stock needs at this juncture,” wrote Mizuho analyst Dan Dolev, who rates the stock a buy with a $175 price target.
Company executives said in February that PayPal would shift its approach to user acquisition in a move that made logical sense to some on Wall Street but also came as a big shock given PayPal’s longstanding focus on net-new account growth. Whereas PayPal previously was aiming for 750 million active accounts in the medium term, Rainey said on the last earnings call that the target was no longer “appropriate.” PayPal planned to start focusing on driving greater engagement from its more active users while pulling back on “incentivized customer-acquisition tactics” aimed at jolting “minimally engaged” users.
The coming report could show “tough” dynamics for PayPal’s net-new account additions, wrote Barclays analyst Ramsey El-Assal. But he also thinks the report could be a “clearing event” for PayPal: The first quarter was up against “the toughest prior-year comparable,” and after the coming report, investors will likely have a better sense for how the strategic changes will actually manifest in user numbers.
Analysts have their eyes on other aspects of the company’s forecasting as well. With its last earnings report, PayPal lowered its 2022 revenue outlook from a preliminary range that it had offered in late 2021, but some are worried that the new outlook might also be difficult to achieve given macroeconomic trends like inflation and a strengthening dollar.
“PayPal likely gets disproportionately impacted from high inflation and its effect on discretionary spending, as PayPal skews towards discretionary e-commerce spend,” wrote Bernstein’s Harshita Rawat, who has a market perform rating and $110 price target on the stock. “The recent dollar strengthening also poses a problem for lucrative international revenue (not just a translation effect).”
Earnings: Analysts tracked by FactSet expect the company to post 88 cents a share in adjusted earnings for the March quarter, down from $1.22 a share a year earlier. According to Estimize, which crowdsources projections from hedge funds, academics, and others, the average estimate is also for 88 cents a share in adjusted earnings.
Revenue: The FactSet consensus calls for $6.4 billion in first-quarter revenue, up from $6.0 billion a year before. The average projection on Estimize is for $6.4 billion in revenue as well.
Stock movement: PayPal shares have declined after the company’s past three earnings reports, including a record 24.6% drop in the trading session following the company’s most recent report. The stock is off 67% over the past 12 months, as the S&P 500 SPX, +0.57% has added about 1%.
One key question is whether PayPal will do a broad reset of its nearer-term and medium-term outlooks in conjunction with the coming report. Realigning expectations could help make PayPal’s stock more attractive to longer-term investors who see a compelling valuation but worry about the prospect of a guidance cut down the line, suggested Wolfe Research analyst Darrin Peller.
“[M]ost would also like to see guidance reset first, before adding materially to positions, with a comprehensive reset of guidance, both near and medium-term, preferred by investors over keeping an overhang on shares (assuming a reset is warranted),” he wrote in a note to clients.
SMBC Nikko Securities America analyst Andrew Bauch was skeptical that investors would see this reset with the coming report, however.
“[W]e think the recalibration of medium-term guidance may take longer than some investors appreciate, given this ‘clearing event’ in our view would be better served if crafted by the incoming CFO,” he wrote, while maintaining an underperform rating and lowering his price target to $105 from $125.
Also notable will be PayPal’s commentary on some of its newer initiatives, such as efforts to derive more revenue from its Venmo service and gain traction with in-store payments.
“[I]n the absence of Venmo and/or in-store monetization, we do not believe PayPal will be able to sustain organic revenue growth faster than the overall e-commerce market i.e. ~15%,” wrote Truist Securities analyst Andrew Jeffrey. He rates PayPal shares at hold with a $115 price target and said that he is “cautious about PayPal’s ability to monetize Venmo.”