It's A Humble Day For Us Because We Were Wrong On PayPal (PYPL). What We're Doing With Shares At 2021's Low. 

9 Nov 2021 9:20 AM EST

Portfolio holding PayPal reported mixed results with its fiscal third quarter earnings release on Monday after the closing bell. While revenue of $6.18 billion (+13% YoY) missed the $6.23 billion consensus, earnings of $1.11 (+4% YoY) per share were better than the $1.07 expected.

Management also announced with the earnings release that PayPal is “teaming up with Amazon to enable customers in the U.S. to pay with Venmo at checkout. Starting in 2022, customers will be able to make purchases on Amazon.com and the Amazon mobile shopping app using their Venmo accounts.” That should certainly add to Venmo’s upside, which now has over 80 million customers, is on track to deliver over $900 million in revenue this year and is at a total payment volume run rate of $240 billion, which on its own equals the entirety of PayPal’s U.S. franchise in 2016.

CEO Dan Schulman commented on the release: “Our third quarter results show solid growth on top of a record year. The strength of PayPal’s two-sided platform and ubiquity in our core markets has set us up to grow at scale, expand our work with existing merchants and attract new partners. We’re thrilled that we are teaming up with Amazon to enable customers in the U.S. to pay with Venmo at checkout.”

CFO John Rainey added: “Our third quarter performance demonstrates the strength of our diversified platform, our global reach, and the scalability of our business. The powerful and accelerating secular tailwinds of increasing ecommerce penetration and cash displacement have helped to advance our leadership position.”

In addition to the headline numbers:

• Total payment volume (TPV), a closely watched metric in the payments space, increased 24% on an FX-neutral basis to $310 billion, a slight miss versus the $312 billion the street was looking

  • Notably, Merchant Services TPV, which is TPV ex-eBay Marketplaces came in at $300 billion, a 30% YoY increase on an FX-neutral basis. This is an important factor that speaks to strength of the core underlying business that will continue on as eBay Marketplaces (which now represents 3% of TPV) rolls off is being temporarily masked by the eBay unwind.

  • Additionally, revenue ex-eBay Marketplaces came in at $5.946 billion an increase of 25% YoY, which when compared to the 13% growth rates seen for total revenues, serves to further demonstrate the underlying growth being masked by the well-known eBay unwind currently underway.

• PayPal added 13.3 million net new active accounts (NNAs), bringing the total number of active accounts to 416 million (+15 YoY) as of the end of the quarter, also a slight miss versus the 417 million expected.

• Engagement was up with payment transactions per active account increasing 10% YoY to 44.2 in the third quarter.

• Total take rate, which is simply total revenue divided by TPV, of 1.99% was largely in line with expectations, while the transaction take rate contracted 25 basis points to 1.81% “driven by lower eBay volumes, higher share from platform partners, larger merchants, and other marketplaces, and unfavorable impact from hedging.”

• As for cash flow, operating cash flow came in at $1.51 billion while free cash flow came in at $1.29 billion (+20% YoY), missing expectations of $2.432 billion and $2.184 billion, respectively.

• Additionally, management took some time to discuss Buy Now, Pay Later (BNPL) dynamics and commented that since launching, the service has processed roughly $5.4 billion in TPV with over $2 billion of that coming in the third quarter alone. Driving that result, the team noted that over 9.5 million consumers have transacted more than 33 million times with PayPal’s BNPL products.

  • Management plans to "expand [their] global pay later portfolio in the first half of 2022 to include longer-term installment plans, allowing consumers to spread higher price purchases over longer periods of time.” This option is already available in Germany, where the team is “seeing great initial success” and a move we believe will put them in more direct competition with market darling Affirm, which has garnered most of the excitement in the fintech space in recent months at the expense of other such as PayPal and the more traditional credit card companies.

Looking ahead, guidance was also disappointing as management is forecasting:

• Fourth quarter revenue of $6.85 billion to $6.95 billion, below the $7.23 billion the street was looking for.

  • Fourth quarter non-GAPP earnings are expected to be ~$1.12 per share, also a miss versus the $1.27 per share consensus.

• FY2021 net revenue of $25.3 billion to $25.4 billion was also a slight miss versus the $25.75 billion the street was looking for.

  • Notably, this guidance is about 0.5% lower than management expected at the start of 2021 as growth rates, impacted by more pressure from eBay than originally anticipated, started to come in below management’s expectations toward the end of the quarter, and the team opted to be more cautious than they were previously due to the ongoing “retail supply chain and labor market concerns, which may impact the important holiday season.” That said, the team added that after adjusting for the increased eBay related pressure, the revised guidance is “actually ahead of the outlook [they] provided at the start of the year.” So, once again we are seeing the eBay pressure mask otherwise solid performance in the portion of the business that will continue on after eBay and ultimately become the entire operating business.

  • FY2021 non-GAAP earnings guidance of ~$4.60 was below the $4.70 consensus

While the results and guidance were disappointing, we believe them to have largely been priced in at current levels with shares down ~30% off all-time highs. 

Management spent a good deal of time on the conference attempting to explain the dynamics of the eBay unwind, commenting: “The back half of 2021 was always going to be the low point of our revenue growth this year, and we are appropriately cautious as we enter Q4 and as we think about 2022. We are seeing the impact of global supply chain shortages in our merchant base. Consumer confidence has weakened with the absence of stimulus payments. And with the economy reopening, more people may be likely to do their holiday shopping in-store as confidence in delivery logistics is depressed from last year. And of course, we still feel the impacts of eBay's managed payments migration over the next few quarters, although at a lessening rate. Almost all of these issues are temporal. And consequently, we expect our revenues will accelerate throughout next year, and we remain confident in our medium-term guidance.”

While the team anchored 2022 revenue growth to around 18%, they added that “due to the cadence of eBay's Payments migration, as well as the stimulus measures earlier this year, [they] expect the first quarter next year to have more difficult comps and be [PayPal’s] lowest growth quarter. [Their] plans are for revenue growth to then accelerate through the year, and to exit 2022 at a revenue growth rate in line with or ahead of [their] medium-term guidance.” Importantly, the team added that their medium-term growth outlook does not rely on acquisitions.

So, while the near-term is going to be a bumpy ride, longer-term there is reason for optimism. We were encouraged by the higher levels of engagement that management is seeing, as a result of the new and improved PayPal app. On the call, the team commented that while it is still early, initial results point to a 25x increase in consumers exploring deals and offerings. Additionally, the team has seen a 15% increase in first-time users transacting in crypto an driven a 35% increase in cash card enrollments. This is certainly something we will keep an eye on as more engagement means more monetization opportunities — be it via advertising revenue opportunities or the ability to drive more purchase activity as merchants seek to have their business featured in the app. In fact, Schulman noted that “the average revenue per account from digital wallet users is twice that of checkout-only users.”

Bottom Line, Decision:

To be clear, we are disappointed with the results we received this evening, and even more disappointed with the stock's reaction after hours. We believed given the stock was in the low of 2021 coming into this print, market was clearly forecasting these disappointing results. However, the 6% decline pre-market that we're seeing this morning shows that this was a disappointment to the market (a "disappointing" disappointment, not an expected disappointment).  Since we don't want to sell low given we've been battling this name for about a month, our decision is to cut half of our positioning in this name. We will then put the stock in the penalty box and wait through this period of growth reset.