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PayPal Stock Slips Despite Increased Outlook. Is the Stock a Buy?
Shares of PayPal (NASDAQ: PYPL) sank after its Q3 earnings report, although the stock overall has been on a strong run since the start of August. Meanwhile, it's up more than 50% during the past year.
While the pullback was small, let's see if this is a good opportunity to buy the stock on the dip.
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Margins over revenue growth
Although investors were disappointed with PayPal's forecast, it was actually the third time this year the company increased it. It said it now sees adjusted earnings per share (EPS) rising in the high teen percentages and transaction margin widening in the mid-single digits. It said the increase was both due to its strong Q3 results as well as a slightly improved outlook for Q4.
Specifically for Q4, the company forecast low single-digit percentage revenue growth and adjusted EPS to decline by a low to mid-single-digit percentage due to discretionary investment spend. Analysts were expecting revenue to grow by 5.4% in Q4, according to estimates compiled by LSEG.
The company said part of the reason for its slower revenue growth in Q4 stems from it prioritizing wider margins over revenue growth as it relates to Braintree unit -- which provides e-commerce businesses with payment services -- when renegotiating contracts. It said this trade-off will carry into 2025 before a new baseline is set.
For the quarter itself, PayPal's revenue rose 6% to $7.8 billion, with total payment volume (TPV) up 9% to $422.6 billion. Payment transactions increased 6% to 6.6 billion, while payment transactions per active account jumped 9% to 61.4 on a trailing-12-month basis.
Branded checkout TPV rose 6% on a constant currency basis, similar to last quarter, while unbranded TPV rose 11%, a deceleration from the 19% growth it saw in Q2. Venmo TPV, meanwhile, was up 8%, the same as last quarter.
Active accounts edged up 0.9% year over year to 432 million, and were up 0.6% sequentially.
Transaction margin dollars, which is similar to gross profit margin, climbed 8% to $3.65 billion. This metric has been a focus for investors, as in recent years PayPal has been able to increase revenue, but it has come from lower-margin sources. Under Chief Executive Officer Alex Chriss, the company is now focusing on gross profit growth ahead of simply revenue growth.
Adjusted EPS soared 22% to $1.20. That easily topped the $1.07 analyst consensus.
In the quarter, the company generated free cash flow (what's left of cash flow after capital expenditure) of $1.4 billion. Meanwhile, it bought back $1.8 billion in stock during the period. It ended the quarter with net cash and investments of $3.8 billion.
Image source: Getty Images.
Is it time to buy the dip?
Although investors may not like that PayPal will temporarily slow revenue growth in order to improve margins, this is the right long-term move. Meanwhile, Chriss is trying to transform the business from more of a payments company to a commerce platform that can help large e-commerce players like Amazon and Shopify, as well as payment platforms such as Adyen and Finserv, all of which it has struck partnerships within the last few months.
This will be done through continued innovation, such as with Fastlane, PayPal Everywhere, and new mobile features. Fastlane, which improves conversion by letting customers check out at various merchants with a single tap without having to set up an account, has seen good initial uptake since being launched in August. PayPal Everywhere, meanwhile, was launched last month and gives users cash-back incentives on a PayPal debit card. These innovations should help drive growth.
Even with its strong recent performance, PayPal stock remains attractively valued, trading at a forward price-to-earnings (P/E) ratio of about 16.6 times and a forward price-to-sales (P/S) ratio of just 2.4 times based on 2025 estimates.
PYPL PE Ratio (Forward 1y) Chart
The company is clearly headed in the right direction under Chriss, who has prioritized profitable growth and innovation above all else. This should be a winning long-term recipe. PayPal is transforming its business, and investors still have a chance to get on board as the company evolves.
As such, I would be a buyer of the stock at these levels.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Geoffrey Seiler has positions in PayPal. The Motley Fool has positions in and recommends Adyen, Amazon, PayPal, and Shopify. The Motley Fool recommends the following options: long January 2027 $42.50 calls on PayPal and short December 2024 $70 calls on PayPal. The Motley Fool has a disclosure policy.
