PayPal’s Earnings Surge And Raises Forecast

PayPal’s Earnings saw a surge in the first quarter, beating its revenue growth target and raising its forecast for the year. The payments company’s growth, which slowed after a surge during the early stages of the pandemic, is now being fueled by two major drivers: unbranded, behind-the-scenes payment processing and interest rates.

PayPal’s unbranded processing volume grew 30% year-over-year, and the interest rates helped the company earn more on the cash that users leave in their PayPal and Venmo accounts.

As a result, PayPal’s revenue growth was 10.4% year-over-year, adjusting for currency fluctuations, in the first quarter. This was 1.5 percentage points higher than the company’s guidance, and PayPal raised its full-year 2023 revenue growth forecast.

Get The Economist and Barrons Digital Subscription for $129

However, the shift in growth drivers is pressuring PayPal’s operating margin growth. PayPal earns more when a consumer clicks a branded PayPal or Venmo button to pay.

Meanwhile, branded checkout payment volume grew 6.5%, and PayPal is competing more fiercely than ever with a growing array of players.

While higher rates are great for margins, the Federal Reserve may soon stop raising rates, or even start cutting them, which means PayPal will face tougher margin comparisons later this year.

As a result, PayPal lowered its forecast for 2023 adjusted margin growth from 1.25 percentage point expansion to 1 percentage point.

Investors’ confidence in continuing strong earnings growth may still hinge on margins. Departing Chief Executive Dan Schulman told analysts that the company has a “high-class problem” with unbranded payments, but evolution in the unbranded business can drive higher margins in the future.

Get WSJ Barron’s Subscription 5-Years for $129

The company’s enhanced branded checkout button functionality, aimed at making it even more competitive with the likes of Apple Pay, will also receive help with the rollout.

In conclusion, PayPal’s Earnings have been driving revenue growth, but the company is facing a changing focus that is putting pressure on its operating margin growth.

The evolution in the unbranded business can drive higher margins in the future, and PayPal’s enhanced branded checkout button functionality can help it remain competitive.

However, investors remain in wait-and-see mode, and confidence in continuing strong earnings growth may still hinge on margins.