Paypal Holdings Inc (PYPL) USD0.0001

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PayPal’s fourth quarter net revenue grew by 4% in the fourth quarter to $8.4bn. This materially lagged payment volumes which grew by 7%.

Underlying operating income came in ahead of market expectations growing 2% to $1.5bn. But growth was held back by a 10% increase in non-transaction related expenses. Free cash flow fell 11% to $2.2bn. Net cash stood at $0.9bn.

In 2025 PayPal expects transaction margin, (a bit like gross profit) to grow by 4-5% to around $15.3bn, below expectations.

The shares were down 7.7% in pre-market trading.

Our view

PayPal’s outlook for 2025 has raised some serious questions about the payment’s company’s competitive position. 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.

Until recently PayPal's strongest volume growth had been its unbranded option 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.

Management’s focus has shifted from unbranded volume to profitability, but it’s important that functionality is further enhanced if it wants to keep growing market share as it firms up prices. A sharp slowdown in unbranded growth at the end of 2024 suggests there’s plenty of work to do to get the balance right.

We're glad to see efforts to re-invigorate the branded checkout business drive some traction. Its blue and gold buttons are well trusted by consumers but in this fast-changing space that’s not enough. Its Fastlane checkout has attracted some big corporate customers but branded growth is also lagging the competition.

Investors will still need more convincing that PayPal is keeping up with the pack. Increased marketing expenditure is one lever that management’s pulling, which is all well and good, but we’ll want to see an improvement in growth rates as a result.

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.

In his first full-year at the helm, PayPal’s CEO Alex Chris has made some bold strategic choices, and they’ve not yet had the desired effect on results. In a market which is flourishing, PayPal’s growth rates are failing to impress. That’s reflected in a valuation towards the bottom of the peer group. Management certainly has its work cut out if it wants to close the gap.

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.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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