PayPal drops as analysts say transaction GP growth ‘looks very weak’

Investing.com — PayPal reported second-quarter results that topped expectations as ongoing strength in consumer spending underpinned payment volume growth.

However, PayPal (NASDAQ:) shares fell about 8% in after-hours trading following the report.

PayPal an EPS of $1.16 on revenue of $7.29 billion. Analysts polled by Investing.com anticipated EPS of $1.15 on revenue of $7.27B.

Active accounts grew to 431M from 429M year-over-year. Total payment volume, a key measure of performance, rose 11%, to $376.5B. The adjusted operating margin came in at 21%, below the average analyst estimate of 21.7%.

The company’s transaction gross profit, which stands for transaction revenue less transaction expenses and transaction losses, rose 1% YoY.

For Q3, adjusted EPS was expected to grow 13% to 14% to a range of $1.22 to $1.24 on revenue growth of 8% to about $7.4B. That compared with Wall Street estimates for EPS and revenue of $1.22 and $7.33B, respectively.

For 2023, EPS was expected to come in at $4.95, just above expectations of $4.94.

The company also said that share repurchases for 2023 were now expected to reach about $5B.

Bernstein analysts attributed the after-earnings weakness in shares to transaction gross profit growth pressures. They added that gross profit (GP) growth “is essentially the true revenue for the company.”

“Transaction GP is a critical health metric, especially because TPV growth is an outcome of many businesses with vastly different gross margins. Stock is down 7% in the aftermarket because, on surface, transaction GP growth looks very weak. Are the gross margin pressures structural or transitory?” the analysts ask in a client note.

Goldman Sachs analysts added:

“Although this may continue to pressure margins in the near-term, PYPL has taken remedial actions to address this underperformance by reducing its receivable exposure. PYPL has also further reduced its credit exposure through the previously announced European pay later receivable deal & sale to KKR,” they said.

Additional reporting by Senad Karaahmetovic