It looks like the payments giant is finally starting to turn things around
Shares of PayPal (NASDAQ:PYPL) stock were skyrocketing Tuesday, up about 9% at the opening bell to around $64 per share. The leading payments provider saw its stock rise after an unexpectedly strong Q2 earnings report and outlook.
Revenue jumped 8% year-over-year to $7.9 billion, which topped estimates of $7.8 billion. Net income rose 10% to $1.13 billion, while earnings per share (EPS) increased 17% to $1.08 per share. Adjusted EPS came in at $1.19 per share, well above the 99 cents per share estimates.
The surge lifted PayPal stock back into the black, as it is up about 5% year-to-date.
Turnaround mode?
The strong performance of PayPal in the quarter has been a long time coming, as investors have been awaiting the turnaround since CEO Alex Chriss took over for Dan Schulman last fall. PayPal had become too big and bloated and Chriss came on board with the idea of streamlining operations and refocusing it back on its strengths, payments, through its PayPal and Venmo platforms.
In the second quarter, investors began to see the fruits of those efforts. While expenses were still up about 7%, a good portion of that was due to $113 million in restructuring charges related to layoffs and other reorganizational efforts.
The streamlining efforts resulted in a key metric, transaction margin, having its best growth rate in three years. The transaction margin, which is essentially how much the company makes on each transaction after subtracting transaction costs, rose 8% — far better than analysts had predicted. It helped boost PayPal’s overall operating margin by 126 basis points year-over-year to 16.8%.
“We delivered our best transaction margin dollar growth since 2021, and we are making steady progress on our strategic transformation, while investing in innovation and operating more efficiently,” Chriss said.
Not only was the transaction margin improved, but PayPal saw an 11% increase in the total payment volume (TPV), the amount spent on PayPal’s platforms, to $417 billion, while the number of transactions rose to 6.6 billion.
Outlook is better than expected
The other sign that the turnaround is in progress is the improved outlook for fiscal 2024. PayPal raised its guidance for revenue and earnings for both the fiscal third quarter and full year.
For Q3, PayPal expects mid single-digit revenue growth and EPS of 96 cents to 98 cents, up from 93 cents the same quarter a year ago.
For fiscal 2024, PayPal expects EPS of $3.88 to $3.98, up from previous guidance of $3.65. That is a 6% increase at the low end. It is also up 1% to 4% from fiscal 2023. PayPal also sees low to mid-single-digit growth in transaction margin for the full year, up from slightly positive in previous guidance.
Mizuho analyst Dan Dolev said in a research note that the higher transaction margin could re-energize PayPal stock.
The other big takeaway from PayPal’s earnings is its improved financials, as it generated $1.4 billion in free cash flow in the quarter, up from -$350 million in Q2 of 2023. The company also raised its guidance for free cash flow to $6 billion in fiscal 2024, from $5 billion.
This will give Chriss and his team more liquidity to invest in the company’s growth. “We are operating from a position of strength, delivering for our customers, and focusing on long-term profitable growth,” he said.
Is PayPal stock a buy?
Investors have been waiting for this for a while, but it appears the turnaround may actually be happening this time.
The stock is trading at just 13 times earnings, which is dirt cheap for a company of this caliber, with the advantages it has as the market leader in its space.
Analysts have a median price target of $75, which would be about 17% higher than the current price. Based on its momentum and financials, and the potential for lower interest rates boosting activity on its platforms, PayPal looks like a good option right now.
