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PayPal: Navigating the Challenging Landscape

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PayPal stock (NASDAQ:PYPL) has faced a substantial decline, with shares down over 80% from their 2021 highs. As of 2023, the stock has experienced a 30% decrease, while the S&P 500 (SP500) has seen a 10% increase.

Silhouette of upset Australian woman over PayPal logo

Investors in PayPal are undergoing significant challenges. Hopes for relief in Q3 are likely to be disappointed. Factors such as PayPal’s new logo penetration in key merchants remaining flat and mixed signals on in-logo penetration trajectory versus Q2 from Bank of America e-commerce data contribute to this disappointment. Additionally, PayPal’s transaction margins have been under pressure. However, on a positive note, analyst consensus points to reasonable earnings projections, suggesting limited downside for the stock.

Given PayPal’s current valuation at around 12 times 2024 earnings, the current share price of $52 presents an attractive entry opportunity.

Market Penetration Showing Stability

Market penetration of key merchants by PayPal has remained strong; however, there has been limited additional growth. According to data compiled by Morgan Stanley, PayPal’s acceptance share among the top 500 U.S. merchants remains at 83%. On a volume-weighted perspective, this share increases to 88%, highlighting PayPal’s widespread usage among the largest U.S. retailers. Notably, PayPal’s major competitors have also not managed to gain share, including buy-now-pay-later pioneers such as Affirm, Afterpay, and Klarna.

3Q23 Acceptance Tracker, dated 9th October

E-Commerce Data Impact on In-Logo Penetration

E-commerce volume and retail consumer sentiment significantly impact PayPal’s success. Bank of America’s aggregated credit and debit card data suggests modest improvement in U.S. e-commerce spending for the September quarter. However, the U.S. Michigan consumer confidence indicator points to a potential decline in transaction volume for August and September, with a further decline in October. The data presents a mixed picture, suggesting a cautious outlook.

U.S. consumer sentiment

Maintaining Margin Pressure

Transaction margins for PayPal have been a topic of debate among investors, with little upside expected in Q3. The shift towards unbranded checkout at lower margins appears to be a structural change rather than a transitory one. Management guidance indicates the potential for further margin pressure in Q3, with a gradual improvement expected in Q4.

Barclays Equity Research - mapping of Paypal transaction margins

Q3 Projections

Analysts project that PayPal’s Q3 total sales will range from $7.25 billion to $7.45 billion, with an average estimate of $7.38 billion. This indicates potential growth of approximately 7.8% compared to the same quarter in 2022. Earnings per share are estimated to fall within the range of $1.18 to $1.32, with an average of $1.28, suggesting a 14% year-over-year growth.

PayPal revenue projections

Although Q3 estimates have remained relatively stable since the end of the June quarter, they have decreased by about 20% compared to a year ago. This indicates a generally de-risked sentiment among investors.

Conclusion: Navigating the Storm

PayPal faces significant headwinds as its stock price drops. While Q3 results are not expected to provide immediate relief, PayPal’s market penetration remains strong and is showing stability. E-commerce data presents mixed signals, and transaction margins continue to be under pressure with expected gradual improvement in Q4. Analyst consensus points to stable earnings projections, albeit lower than a year ago. With PayPal’s current valuation, the current share price presents a long-term entry opportunity, but investors should not expect an immediate turnaround with Q3 reporting.

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