PayPal Stock Down 23% YTD but Strong Q1 and Upside Target Signal Rebound Ahead

PayPal’s (NASDAQ:PYPL) turnaround has been progressing, but an economic slowdown and the potential for rising inflation amid a budding trade war has presented some challenges.

However, the online and mobile payments leader keeps charging forward, delivering solid first-quarter earnings in a challenging environment.

In the first quarter, PayPal generated $7.8 billion in revenue, a 1% year-over-year increase. However, it fell short of analysts’ estimates of $7.85 billion. But there were other key metrics that performed better than expected.

Net income soared 45% to $1.3 billion, while earnings jumped 56% to $1.29 per share. Adjusted earnings of $1.33 per share exceeded estimates of $1.16 per share.

One of the turnaround initiatives by new CEO Alex Chriss was to streamline costs and become more efficient, and that is starting to take hold. The company trimmed operating expenses by 4% in the quarter to $6.26 billion, which helped lift earnings. A big chunk of that came from a reduction in restructuring costs, as well as a drop in transaction expenses.

It allowed PayPal to boost its operating margin by 447 points to 19.6%.

“PayPal had a great start to the year, and our strategy is working. This is our fifth consecutive quarter of profitable growth with progress across branded checkout, PSP, omnichannel, and Venmo,” Chriss said. “We are transforming into the leading commerce platform connecting consumers and merchants globally. Our foundation is solid, and we have multiple ways to win.”

Total Payment Volume Rises 3%

While revenue was mostly flat, PayPal made gains in some key metrics and dropped in others. One of gains was in transaction margin dollars, which is the revenue after transaction costs are subtracted. In Q1, transaction margin dollars increased 7% to $3.7 billion.

However, the take rate, which is how much PayPal takes from facilitating a transaction, was 1.87%, which was down from 1.91% a year ago.

Also, total payment volume (TPV), the amount spent on the platform, increased 3% to $417 billion, while the number of active accounts increased 2% to 436 million.

Despite the rise in accounts, payment transactions decreased 7% to 6.0 billion, while payment transactions per active account decreased 1% to 59.4.

Maintains Guidance Despite Tariffs

While some investors may be concerned about the impact of tariffs on PayPal’s business, the company did not reflect that in its guidance.

PayPal maintained its guidance for the full year, calling for earnings of $4.80 to $4.95 per share, up from $3.99 per share a year ago. For the second quarter, it is guiding for earnings of $1.24 to $1.26 per share, up from $1.08 per share the same quarter a year ago.

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But PayPal executives are mindful of the potential impact of tariffs on consumer behavior.

“Consumer spending and the labor market have proven resilient, but it remains to be seen how tariffs and other trading friction will impact global economic activity, consumer spending,g and supply chains over time,” CFO Jamie Miller said on the earnings call.

While the tariffs may have pulled some spending forward into Q1, Miller said the estimate for second quarter transaction margin dollars is robust at $3.75 billion to $3.80 billion, or 4.5% growth at the midpoint.

Miller said PayPal only gets about 2% of its branded checkout TPV from China, so it's not a huge impact.

“I think we come into this from a position of, we are globally diversified our merchant base, our regional base — it’s just very, very global and diverse,” he said.

PayPal stock is down about 23% YTD, but it has a median price target of $80.50 per share, which suggests 21% growth. It also has the benefit of a very low P/E of 16. That should grab investors’ attention.

Written By: ValueWalk