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Paypal: Q3’23 Earnings

PayPal (PYPL) Q3 Earnings Beat Estimates, Revenues Up Y/Y

Q3’23 Overview

  • PayPal Holdings, Inc. exceeded Q3 earnings forecasts by reporting $1.1 billion in free cash flow.
  • During the fiscal year 2023, the company allocated a considerable portion of its free cash flow towards repurchasing its own stock.
  • PayPal’s non-GAAP operating income margin demonstrated sequential improvement.
  • Despite experiencing a decrease in accounts during Q3 2023, PayPal’s robust free cash flow and profitability continue to offer significant value to investors.
  • The company’s shares are particularly appealing from a valuation standpoint, especially when compared to other FinTech companies.

PayPal Holdings, Inc. (NASDAQ: PYPL) delivered a robust Q3 earnings report, reaffirming its position as a valuable player in the Fintech industry, with a strong focus on generating free cash flow. In this quarter, PayPal not only exceeded both revenue and profit expectations but also generated $1.1 billion in free cash flow (FCF) while actively engaging in stock buybacks. Additionally, there was a notable improvement in the company’s non-GAAP operating income margin in Q3 of 2023.

Despite facing ongoing challenges in terms of account growth during the third quarter, I believe that the company’s impressive transaction per account growth and its highly appealing valuation, which is near one-year lows, offset the inherent investment risks associated with PayPal.

PayPal exceeded expectations for the third quarter in both revenue and earnings. The company reported an earnings per share (EPS) of $1.30, surpassing the consensus estimate by $0.07 per share. Additionally, PayPal slightly outperformed revenue expectations and delivered a beat of $35 million in revenue.

Several noteworthy points in PayPal’s Q3 earnings report warrant further discussion.

One particularly striking figure that captured my attention once again is the count of net new active accounts, which serves as a metric for PayPal’s platform growth. The Fintech disclosed a total of 428 million active accounts within its ecosystem, reflecting a modest decrease of 3 million compared to the previous quarter. However, the heartening trend is the continued growth in transactions per account. The existing customers on the PayPal platform are displaying increased activity, utilizing the company’s payment services more frequently. Transactions surged by 13% year-over-year, with an average of 56.6 transactions per account.

PayPal remains committed to generously sharing its cash with shareholders. In the most recent quarter, Q3 2023, the company returned a total of $1.4 billion to shareholders through stock buybacks, aligning with its previous guidance to allocate approximately $5 billion to buybacks for the year. Over the first nine months of FY 2023, PayPal has invested $4.4 billion in stock buybacks, signaling its intent to distribute a significant portion of its free cash flow to shareholders throughout the year.

Free cash flow is the paramount metric for owners to consider as it quantifies the amount of cash available for withdrawal from the business. In this context, PayPal demonstrates immense profitability, having generated an average free cash flow of $950 million during Q3 2023. When adjusting for high-frequency trading accounting, the average adjusted free cash flow stands at $1.4 billion, further emphasizing the company’s robust financial performance.

PayPal’s growth rate may not be as rapid as that of newer Fintech startups, primarily because it operates a well-established payment processing business at its core. Projections suggest that PayPal is on track to achieve 8% top-line growth this year, with an expected 9% growth rate for the following year. However, PayPal’s real strength lies in its role as a free cash flow return investment, offering a highly attractive valuation multiple that is currently trading near one-year lows. This perspective underscores PayPal’s appeal as an investment opportunity, particularly for those seeking strong free cash flow returns in their portfolio.

When compared to other Fintech companies, PayPal stands out with an exceptionally low valuation, trading at just 9 times the estimated earnings for the fiscal year 2024. This valuation is notably below the price-to-earnings (P/E) ratios of its higher-growth counterparts in the Fintech industry.

While it’s true that PayPal’s growth rate may not match that of companies like Block, Inc. (SQ) or Upstart Holdings, Inc. (UPST), the fact that it is currently trading at near one-year lows makes it an appealing choice for long-term investors. The attractive valuation suggests that PayPal may present an opportunity for investors seeking a more stable and established presence in the Fintech sector, even if it means sacrificing some of the high growth associated with newer entrants.

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