PayPal Earnings: Growth Picks Up, Strong Margin Improvement

PayPal Stock at a Glance

• Fair Value Estimate: $135
• Morningstar Rating: 5 stars
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Narrow

PayPal Earnings Update

PayPal PYPL had a strong start to the year, with the company outperforming expectations for the quarter. While we are pleased with the quarter, we see no major surprises and will maintain our $135 fair value estimate. We continue to see shares of the narrow-moat company as undervalued.

Net revenue grew 9% year over year, or 10% excluding currency impacts. Volume was up 12% on a constant-currency basis. In both cases, this marks modest acceleration from the previous quarter. However, we continue to believe investors should focus less on near-term absolute growth, and more on relative growth. As such, we are encouraged by management’s statement that they believe they picked up share in the quarter. We see holding or improving share as the most critical factor in maintaining the company’s moat and long-term growth prospects.

Active account growth remains stalled, and accounts actually declined slightly sequentially. However, we think management’s strategy to pivot toward driving more transactions from its existing consumer base makes sense. To this end, we are encouraged by the fact that transactions per active account grew 13% year over year, maintaining the strong growth we’ve seen in recent quarters.

We believe there is significant room for PayPal to improve margins over time and see the quarter as providing further evidence of this potential. Adjusted operating margins improved to 22.7% from 20.7% last year. Further, adjusted margins exclude the impact of stock-based compensation, which declined 21% year over year. On a GAAP basis, margins improved 320 basis points year over year.

PayPal bought back $1.4 billion in stock during the quarter and management expects stock repurchases to be about $4 billion in 2023. This would be in line with the 2022 level and suggests that the vast majority of free cash flow this year will be returned to shareholders. Given that we see shares as undervalued, we view repurchases as a good use of cash.