“PayPal had a strong finish to a successful 2024 with results that were better than we expected. We set out at the beginning of 2024 to narrow our focus, improve execution, and reposition the business. One year later, I’m proud that we’ve laid a strong foundation for long-term, profitable growth across the company’s most important areas. The improvements we made to branded checkout, peer-to-peer, and Venmo, plus the progress we made on our price-to-value strategy, are beginning to show up in our results. The strong momentum we’ve created sets us up well for 2025, which is about scaling adoption. I’m excited to share more at our Investor Day later this month.”
Alex Chriss
President and CEO
To check out my full PayPal Thesis – Follow this link
Overview
Another solid quarter in the bag for the team over at PayPal but we have some interesting guidance to talk about. Hint… I don’t like it.
You can find the full earnings deck release here.
You can find the financial reports here.
Highlights
• Scaling checkout enhancements, improving PSP profitability, and monetizing Venmo.
• Returned to profitable growth: TM$ ex. interest on customer balances, +5% in FY’24
• Expecting at least +5% TM$ ex. interest on customer balances, $6B-$7B FCF, and ~$6B share repurchase in FY’25.
• Announced new $15B share repurchase authorization.
Updated Vizual Summary Charts
Key Charts
The things I love the most:
• Buybacks are back. $15 billion set aside for the next round which could retire an additional 17% of the current share count over the next few years. $1.2 billion spent on buy backs for Q4 2024, $6.0B on a trailing 12- month basis, reducing weighted average shares by 6%. Love it.
• Good growth in SMB, would love to see this continue.
• Venmo monetization going well.
• Nearly 100% PayPal Debit Card TPV growth.
• Active accounts up YoY, 434 million with Monthly active accounts up YoY 229 million.
• Total take rate and transaction take rate moving back up, possible we have seen the bottom.
• Free cash flow grew 60% YoY and guiding for it to increase again in 2025.
• Nearly 100% PayPal Debit Card TPV growth, so offline payments growing very well.
Here’s what I like less:
• PSP (Unbranded card processing) has dropped dramatically as they trim low margin payments to improve margin growth, it will hurt top line but benefit the bottom line in the long run. The problem here is that its not being offset yet. Branded checkout is flat and Venmo is only just turning around, P2P and other is growing but that’s not the high payment volume area.
• Transaction per active account dropped.
• Still a bloated headcount @27,200, would like more job cuts.
Guidance was probably the biggest disappointment, so lets talk about that one in more detail!
Analyst Guidance
Nothing to complain about here with estimates, but I would expect to see analysts dropping these lower based on the guidance from PayPal we have been given.
PayPal’s guidance looks ok on paper. Market expected 7% non GAAP eps growth and we got 6% to 8%. However, if we look at the image below can you tell me what’s missing from this section? Revenue. It’s been removed! I think the bears will be all over that. We did get some clarification of this on the earnings call, with PayPal advising flat to low single digits, which is below market expectations and below their prior 7% growth. Awful. Are we not pricing in the Ad’s business at all, which is meant to roll out 2025 as a high margin revenue stream? Are we sandbagging massively? PayPal goes on to talk about a 5% headwind on revenue due to negotiations with Braintree customers. This brings the fear factor with revenue declining to potentially 0% to 1% growth for full year 2025, but I think the market has failed to realise this is a hit to the top line but potentially not the bottom line as margins will improve and not negatively impact free cash flow or transaction margin dollars. I assume that’s why they mentioned them on key takeaways instead of revenue.
What’s confusing about this guidance is that we have been led to belief the Ad’s business should be rolling out in 2025… And that doesn’t seem to have been mentioned or guided for. The stable coin is also absent as a talking point.
Overall, PayPal is shifting focus to profitability instead of just window dressing, which I like. You can have all the money in the world and two bob coming in, but if its not getting to the bottom line then its all junk. The business is becoming leaner which is a good thing, but is it good enough?
PYPL Guidance – This pic needs to be updated
Activity
Insiders sold into the price moving up, can’t blame them really. They have been holding on to them shares for a while and they have come up in value lately. Short interest remains very low even after rising to 3%, so don’t get excited for a squeeze anytime soon. The one thing that doesn’t thrill me here is that the institutions have been trimming positions for a while., although you can see a more detailed view of this below, which shows we may be seeing a potential turn around.
Balance Sheet
Flat YoY and not much excitement with ”getting back to growth”, probably a lot of people going to be selling out of the stock due to it being such a slow turn around.
Risks to PayPal
• Economic slow down.
• Higher inflation.
• Competition in payment processing.
• Regulatory challenges from new government but don’t think this is an issue as they should be tailwinds for financials.
• Crypto is also available via PayPal so could be some regulatory issues there, most likely to be a boost to the company though. Given how pro crypto the new government is.
• The AD’s business turns out to be smoke and mirrors.
Conclusion
My thesis remains intact but like many I find the 2025 guidance concerning and I’m hoping we get some clarification on growth plans during the February 25th investor day. Fundamentally they have been improving consistently and planning well for the future, even if it’s much slower than anticipated. I’m still confident this stock gets where I want it to over the next year or so If Fastlane and Advertising land well, but we need to start seeing results.
There wasn’t much in this earnings about the Ad’s business or their stable coin, and that was especially noticeable with the poor guidance, why this wasn’t bought up in the Q/A is beyond me.
Overall I think the market was willing to overlook falling revenue in favour of margins ”IF” they had come in with guidance that was a little bit more growth instead of value. They did tell us in the prior earnings call that this would be the strategy, so we knew it was coming, and maybe the poor guidance is to keep price low for buybacks as they roll out the higher growth plans. Investor day should clear some of this up and tell me if it’s just wishful thinking. If not, we’ll have to wait for the Braintree negotiations to complete before we see revenue start to climb again, which they don’t expect to see until 2026.
