PayPal’s second-quarter revenue rose 9% to $7.9bn, ignoring currency movements. That’s ahead of previous group guidance of 7%.
The growth was driven by an 11% increase in total payment volumes, with unbranded card processing being the largest contributor. However there was a positive contribution from all other channels bar eBay which now accounts for just 2% of volumes.
Underlying operating income increased 24% to $1.5bn, reflecting both the revenue growth and disciplined cost management. This more than offset the dilutive effect on margins of PayPal’s unbranded operation, which is growing its share of the business mix.
Underlying free cash flow was up 31% to $1.1bn. PayPal’s net cash position was $3.9bn.
PayPal repurchased $1.5bn of its own shares and now expects the full-year total to reach $6bn, up from the precious steer of at least $5bn. The outlook for underlying earnings per share growth has been improved to a low to mid-teens range, up from mid to high-single digit growth.
The shares were up 5.1% in pre-market trading.
Our view
In his first year in charge, CEO Alex Chriss has so far delivered two upgrades in a row for PayPal. We still see plenty of structural growth drivers in the electronic payments industry. But the model is facing some strong headwinds.
In the digital wallet space, competition is intensifying from the likes of Apple Pay and Google Wallet, which are vying to become consumers' preferred payment method of choice. The space is becoming equally crowded in terms of services to merchants, and here there are newer entrants with arguably superior technology offerings.
What PayPal does have on its side is scale, and for now, it remains the market leader in online payment processing. But the competitive pressure means growth is getting harder to come by.
PayPal's strongest volume growth is currently coming from its unbranded business which allows businesses to put their own name to the payment solution, but it’s starting to come up against some more challenging comparisons. It also opens the door to provide retailers with additional services such as the buy-now, pay-later offering, which we think may see further traction as consumers increasingly turn to credit to fund their spending.
We remain concerned about the lower profitability of payments on the unbranded side of the business. Looking ahead, management is firmly focused on improving the Group's offer to both businesses and consumers. We're glad to see efforts to re-invigorate the branded checkout business drive some solid traction. But there are some question marks around the sustainability of this revival.
PayPal is fighting hard to remain relevant in the payments world. Its new Fastlane checkout promises to enhance the payments experience for customers, and a new advertising platform seeks to generate more revenue by helping its corporate customers engage with consumers. Some of the bill for this innovation is being funded by an aggressive cost-cutting program. There's more of that to come this year but trimming the cost base can't offset lower profitability indefinitely without negatively impacting the ability to grow and innovate.
A robust balance sheet, and strong free cash flows give firepower to make acquisitions, invest internally in upgrading the product suite, or distribute cash to shareholders. But remember, no returns are ever guaranteed.
Previous operational missteps and increased competition have put serious downward pressure on PayPal's valuation, which is well below its long-run average. Margins are moving in the right direction again, but we’d like to see a long-term trend develop before getting too excited. Results are also benefitting from robust payment volumes, supported by continued consumer resilience. But there’s no guarantee that will continue so be prepared for some ups and downs.
Environmental, Social & Governance Risks
The technology sector is generally low-risk in terms of ESG, but some segments like Electronic Components can be more exposed to environmental risks. Regulatory interest in the sector has picked up recently, leading to more acute business ethics risks. Other key risks include labour relations, data privacy and product governance.
According to Sustainalytics, PayPal's overall management of material ESG issues is strong. Concerns about anti-money laundering processes appear to have been addressed. The company fosters a culture of privacy by design and mandates annual employee training on data privacy. Its diversity programmes are well thought but staff turnover has been relatively high, a trend seen across much of the sector. PayPal is keen to highlight its place as a facilitator of donations to good causes. However there have been concerns raised about the transparency of its giving platform.
PayPal key facts
All ratios are sourced from Refinitiv, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
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