PayPal’s Q1 performance demonstrates promising growth potential amid competitive challenges, signaling both opportunities and uncertainties for investors.
- PayPal’s Q1 earnings surpassed expectations, showing strong revenue and EPS growth, along with strong guidance for 2024.
- Despite attractive multiples and a “value play” status, PayPal faces risks, including competitive pressures in the payment market.
- While PayPal presents opportunities for shareholder returns with its cash generation, uncertainties persist due to its evolving business landscape.
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PayPal (PYPL) has just released its Q1 earnings, surpassing consensus and raising guidance overall. Additionally, its operational indicators showed some improvement, though with more neutral figures on user growth.
While the stock seems attractive, considering its multiples and strong cash generation, it could be considered a “value play.” However, it also faces some risks that cloud the scenario, such as competition.
PayPal Q1 Overview
As mentioned, PayPal exceeded market estimates, delivering compelling financial indicators, including:
- Revenue increased to $7.6 billion, marking a 9% YoY growth and surpassing estimates by 2.4%.
- GAAP EPS rose to $0.83, an 18% YoY growth, surpassing estimates by $0.05.
This result also outperformed the company’s own guidance. Speaking of guidance, the company provided numbers for Q2 and for 2024. Overall, strong figures indicate double-digit growth for EPS and 6.5% for revenue, slightly below what the market projected for topline growth. On the other hand, the company raised the 2024 EPS GAAP to ~$3.65 and a Free Cash Flow of $5 billion.
On the operational side, the company reported a 14% increase in TPV, reaching $403 billion. Transaction margin reached $3.46 billion, resulting in a 4% YoY growth but a decline of -5.7% QoQ. This revenue and TPV increase resulted from a rise in payment transactions and transactions per active account (TPA), with YoY growth of 11% and 13%, respectively. Meanwhile, Active accounts retracted by 1%, ending at 427 million.
Time to Buy PayPal Stock?
Considering the guidance for the year 2024, we would find a forward P/E of 18.7x and a P/FCF of 14.4x. The historical data shows a reasonable multiple, relatively similar to recent quarters but appearing cheap compared to previous years.
However, multiples alone are not sufficient to evaluate a stock. At 14x Free Cash Flow, it seems very attractive, but the consensus does not expect the company to maintain an interesting pace of growth and profitability.
Market estimates price PayPal’s revenue to grow at a rate of 7%-8% annually, a reasonable level considering such a multiple. However, they expect operational profit (EBIT and EBITDA) to grow much slower, implying a worse margin scenario.
Thus, based solely on Q1, PayPal appears more of a value play than a value trap. Its multiples are attractive if the company can maintain this pace, which seems plausible given the successful initiatives focused on driving profitable growth.
The Verdict
Even though PayPal stocks seem attractive at their current pace, they also don’t appear to be a huge bargain when considering risks, such as competition in the payment market, which could result in not only lower revenue growth but also lower margins (depending on the level of competitive landscape).
From my standpoint, this risk is entirely tangible, even considering that PayPal is already a well-established company and market leader. Its service is analogous to a commodity, meaning it could face even more intense competition and technological disruptions in the future.
That said, PayPal remains a cash-generating company that can bring interesting returns to shareholders, but it also carries inherent uncertainties related to its business model.
(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content)
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