Published - August 2nd, 2023 @ 1:05 PM (GMT+2)

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PayPal Holdings Inc. (NASDAQ:PYPL) has reported its second-quarter results, reflecting both strengths and weaknesses in various aspects of its performance. The company's earnings and revenue have exceeded expectations, but specific metrics have fallen short, leading to a mixed reaction from analysts and investors.

Q2 Performance Overview
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PayPal's Q2 revenue increased to $7.29 billion from $6.81 billion, while the consensus expectations were for about $7.27 billion. The company's net income for the quarter was $1.03 billion, or 92 cents a share, compared to a net loss of $341 million, or 29 cents a share, in the year-earlier period. On an adjusted basis, PayPal earned $1.16 a share, up from 93 cents a share a year prior, while the FactSet consensus was for $1.15 a share.

Payment Volume Growth
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The company logged $376.5 billion in total payment volume for the period, an 11% rise, while analysts had expected $368.9 billion. Active accounts grew to 431 million from 429 million year-over-year. This ongoing strength in consumer spending underpinned payment volume growth.

However, PayPal fell short of a margin metric and disappointed Wall Street with its transaction take rate, which came in at 1.74%, while consensus expectations were for about 1.9%. The adjusted operating margin was 21%, below the average analyst estimate of 21.7%. The company attributed the shortfall to its credit portfolio, where PayPal generated less revenue than anticipated and increased its loss provisions.

Gross Profit Dynamics
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While revenue was up 7%, gross profit increased only 1%. Given the mismatch between revenue and gross-profit growth, analysts and investors are likely to focus on gross-profit growth dynamics. The company's transaction gross profit rose just 1% YoY.

Future Outlook
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PayPal expects continued pressure on transaction-margin performance in the third quarter before conditions improve in the fourth quarter. Over the long haul, factors such as accelerated branded checkout and e-commerce growth, improved cross-border trends, and new value-added services are anticipated to benefit PayPal's transaction margins.
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For Q3, adjusted EPS is expected to grow 13% to 14% to a range of $1.22 to $1.24 on revenue growth of 8% to about $7.4 billion. For 2023, EPS is expected to come in at $4.95, just above expectations of $4.94. Share repurchases for 2023 are now expected to reach about $5 billion.
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Bernstein analysts attributed the after-earnings weakness in shares to transaction gross profit growth pressures. Goldman Sachs analysts added that PayPal has taken remedial actions to address underperformance by reducing its receivable exposure and further reduced its credit exposure through the previously announced European pay later receivable deal & sale to KKR.

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Conclusion

PayPal's Q2 results have topped expectations in some areas while falling short in others. The company's performance in payment volume growth is commendable, but concerns about margins and take rate may overshadow these achievements. The future outlook remains positive, with expectations for growth and expansion in various sectors.

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