PayPal beat third-quarter earnings estimates and raised its full-year profit forecast, yet its stock rose just 1% on earnings day. Revenue missed expectations, and most of the earnings growth came from cost cuts and share repurchases rather than the core business.
PayPal's third-quarter results looked strong at first glance: adjusted EPS grew 8% year over year and beat analyst estimates, and management raised its full-year profit guidance.
The market response was muted, however. The stock initially fell modestly after the report, and as of 2 p.m. ET it was higher by just 1%, according to Motley Fool contributor Matt Frankel.
Branded checkout growth stays weak
Revenue grew by just 2% to $8.58 billion, short of expectations. Transaction margin dollars, a gross profit indicator, also rose by only 2%.
The bigger issue is branded checkout, PayPal's most profitable business. Its payment volume grew by just 1% on a currency-neutral basis, the fourth consecutive quarter of 1% to 2% growth. Meanwhile, the transaction take rate declined to 1.58% from 1.64% a year earlier, and management is only forecasting slight growth in transaction margin dollars for the fourth quarter.
Venmo, BNPL and debit cards grow faster
Other parts of the business performed better. Venmo payment volume grew 14% year over year, buy now, pay later volume grew 25%, and US payment volume on PayPal and Venmo debit cards grew by more than 60%.
Management expects products like these to make up more than 20% of transaction margin dollars this year. That still leaves 80% coming from low-growth revenue streams.
Buybacks and expense cuts drive earnings
PayPal grew earnings per share by 8% while gross profit rose just 2%. According to Frankel, cost reductions and buybacks are the primary drivers. The company has eliminated over 2,000 roles and targets over $1.5 billion in annual savings over the next few years. It also spent $6 billion on stock buybacks over the past 12 months, cutting its weighted share count by 11%.
Frankel says that kind of growth is not the quality earnings growth investors want from the core business. PayPal trades for less than 10 times its expected 2026 earnings, and he writes that earnings beats fueled mainly by expense reductions and buybacks aren't likely to move the stock much until branded checkout grows again.
Source: Motley Fool
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