PayPal (PYPL.O) forecast fourth-quarter revenue below estimates earlier this week as the digital payments company shifts its focus to higher-margin businesses from aggressive expansion, sending its shares down 6.6 per cent before the market open.
Efficiency has been a focal point for PayPal as CEO Alex Chriss, who took the helm last year, pushes for cost discipline through job cuts and higher investments in automation and artificial intelligence.
The company lifted its 2024 profit forecast for the third time this year, also benefiting from higher consumer spending in a sign of US economic resilience.
“We are making solid progress in our transformation as we bring new innovations to market, forge important partnerships with leading commerce players, and drive awareness and engagement through new marketing campaigns,” CEO Chriss said.
PayPal is moderating growth in low-margin units such as Braintree that provides payments technology to businesses, and instead focusing on lucrative segments like branded checkout.
The company expects revenue in the fourth quarter to grow by a “low single-digit” percentage compared with the 5.4 per cent growth analysts polled by LSEG had expected.
Third-quarter revenue jumped 6 per cent to $7.85 billion but missed estimate of $7.89 billion.
Still, PayPal expects earnings per share, excluding one-time costs, to grow in the “high-teens” percentage range in 2024 – an increase from its prior forecast of “low to mid-teens”.
Adjusted profit grew 14 per cent to $1.23 billion in the third quarter. On a per-share basis, PayPal earned $1.20 versus 98 cents a year ago.
PARTNERSHIPS IN FOCUS
Rivals, including Zelle and tech giants such as Apple (AAPL.O) and Alphabet (GOOGL.O), have challenged PayPal’s dominance in a fast-evolving payments industry.
The popularity of Apple Pay may also present challenges in getting customers to switch to PayPal’s products, analysts at William Blair have said.
To keep its edge, PayPal is pursuing new partnerships and expanding existing ones with companies in the retail and payments sector such as Fiserv (FI.N), Adyen (ADYEN.AS), Amazon (AMZN.O), Global Payments (GPN.N) and Shopify (SHOP.TO).
These partnerships, along with the “one-click” checkout feature called Fastlane that PayPal introduced in January, have resulted in a 36 per cent surge in its shares this year, outperforming the S&P 500 index (.SPX).
Analysts, however, said these are longer-term initiatives and may take some time to move the needle.
The company’s operating margins, on an adjusted basis, expanded 194 basis points to 18.8 per cent in the third quarter.
The metric has been under scrutiny over the past year as investors assess the sustainability and overall health of PayPal’s business.
