PayPal: Growth outlook remains disappointing (Downgraded)

Investment Thesis

PayPal Holdings (Nasdaq:Pipple) price movement has slowed over the past year due to a lack of growth catalysts and a deterioration in active customer accounts. previous Buy insurance Since last November, I have been optimistic about the new CEO’s priorities of growth and improving trading margins. Since then, shares have risen more than 10% following my rating upgrade. The company delivered better-than-expected results in both sales and earnings in Q1FY24, but forward guidance is below expectations. Indeed, PYPL has shown signs of a recovery in trading revenue growth and stabilization of margins. However, trading margins continued to deteriorate to 45% from 45.8% in Q4FY23.

While a clear uptrend in the stock price is yet to be seen, investors should wait for potential upside. Long-term recovery. Given the high overall market valuation, the stock is actually trading at a significant discount to historical levels. However, we believe PYPL is currently fairly valued and will likely continue to trade on the sidelines. With a weaker growth outlook and the possibility that a recovery may take longer than previously expected, we have downgraded the stock from a Buy to a Neutral recommendation.

Single-digit revenue growth

We are very pleased that transaction revenue grew double digits at 10.5% in the most recent quarter, the highest growth rate in the last five quarters. However, net revenue growth was in the single digits, primarily due to a 1.6% year-over-year decrease in revenue from other value-added services. This was the first negative growth since FY20. Earnings ReportManagement attributed the slowdown to two main factors: a decline in merchant receivables and lower revenues from its off-balance sheet U.S. consumer revolving credit portfolio.

In terms of guidance, the company expects its net revenues to grow just 6.5% year-over-year in Q2 FY2024, below market consensus. The current single-digit growth trajectory is significantly below the +20% revenue growth rate experienced during the pandemic era in FY2020-FY2021. I still believe PYPL’s revenue growth is a major concern for investors. If PYPL were to stop growing its active customer accounts, I expect the company to continue to maintain mid-to-high single-digit revenue growth. This would impact the stock’s multiple expansion and keep the current valuation multiple as a value trap in the future.

Active customer accounts continue to decline

Let’s take a look at PYPL’s key growth metrics. While total TPV in Q1FY24 maintained its mid-teens growth trajectory, active customer accounts declined 1.4% YoY, marking the third consecutive quarter of negative YoY growth. This indicates that growth in transaction volume and payment transactions per active account remains on track, indicating robust customer engagement. However, the increase in revenue per user may be partially attributable to the backdrop of high inflation. As transaction take rates continue to decline due to intense competition in the fintech industry, we believe increasing customer adoption is key to sustainably boosting total TPV, as the number of payment transactions per active account over a 12-month period is unlikely to increase significantly. Therefore, if active customer account growth accelerates again, I would be even more bullish on the stock.

Margin Analysis

Looking at margins from the chart, we can see that PYPL’s non-GAAP EBIT margins and non-GAAP net income margins have declined significantly over the past few quarters from over 20% post-pandemic to the mid-high teens range. This decline is also driven in part by slowing net revenue growth. I believe the lack of margin expansion is another reason investors should not be bullish on this stock in the near term. With both growth prospects and margins well below pandemic-era levels, it is highly unlikely that the stock will see a significant recovery to prior highs.

Fastlane’s Early Progress

Management noted on the earnings call that Fast Lane Checkout has improved guest checkout conversion rates by low double digits for participating merchants. The company plans to make Fast Lane available in the U.S. in the second half of 2024. The team believes that roughly 40% of undiscovered customers who engage through Fast Lane now have the opportunity to remarket to them and convert them into PayPal customers.

However, we have found that unbranded checkouts typically have lower take rates and may not translate into significant revenue growth compared to branded checkouts. We think it makes sense for management to prioritize adoption over pricing, but it may take several quarters to really see the value of this process contributing to overall revenue growth.

evaluation

PYPL is currently trading at 14.7x non-GAAP FY24 P/E, well below the S&P 500’s P/E of +20x, suggesting the company’s growth prospects are subpar. Take a look at the chart above. PYPL’s GAAP P/E is 15.48, near a 10-year low. As I mentioned in my previous article, PYPL is a value trap due to the lack of growth catalysts. Investors should keep in mind that holding this stock requires patience.

According to FactSet, the 10-year average FTM P/E for the S&P 500 is about 17.7x. As a company with single-digit growth rates and flat profit margins, we believe this average multiple is a reasonable benchmark for PYPL. Given PYPL’s GAAP EPS FY2024, guidanceThe company is expected to make $3.65 in earnings per share, which means the fair value of PYPL is close to $64.6.

Conclusion

In conclusion, while PYPL could represent a great upside opportunity for long-term investors willing to wait for a potential turnaround, the current outlook suggests that the road to recovery may be longer than previously expected. The current cheap valuation reflects the possibility of a single-digit growth trajectory and flat margins in the near term. Again, the highly competitive fintech industry means that strengthening customer engagement is key, but the company needs to expand its customer base to boost volume growth prospects. Therefore, as the company continues to grapple with sluggish customer growth and slowing growth prospects, I have downgraded the stock to Neutral.