PayPal Earnings: Growth Slows Modestly Sequentially

PayPal’s PYPL growth slowed a bit in the second quarter from the strong start it saw during the first quarter, and management’s guidance suggests growth in the third quarter will roughly mirror results from the second quarter. While we think the market might focus on the deceleration, PayPal is tracking in line with our expectations for the full year, and we are encouraged by management’s comments suggesting that the company is approaching a positive inflection point. We will maintain our $135 per share fair value estimate for the narrow-moat company and see the shares as materially undervalued.

PayPal’s net revenue increased 7% year over year, or 8% on a constant-currency basis. Total payment volume increased 11% on a constant-currency basis. In both cases, this marks a modest deceleration from the previous quarter. However, we continue to believe investors should focus less on near-term absolute growth and more on relative growth.

Branded checkout (legacy PayPal) volume grew at a mid-single-digit constant-currency rate in the quarter but accelerated to 8% in July, according to management. Meanwhile, unbranded processing (Braintree) volume grew at nearly a 30% rate in the quarter.

While we think PayPal-branded checkout may be losing a modest amount of share at the moment, Braintree appears to be more than making up for it. In our view, overall share should be an investor’s primary focus. We see holding or improving overall share as the most critical factor in maintaining the company’s moat and long-term growth prospects.

PayPal’s adjusted operating margins improved to 21.4% in the second quarter from 19.1% last year, driven by a 11% year-over-year decline in nontransaction expenses. Management continues to expect at least 100 basis points in margin improvement for the full year. We continue to believe the scalable nature of the business and improved cost discipline provide room for PayPal to improve margins over time.