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PayPal Holdings, Inc. (Nasdaq: PYPL Equity) Stock Q1CY22 Earnings Review

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28-May-22 Current Price: $85
Wisdom Global: PYPL: 1QCY22 result review
USD Mn 1QCY22 YoY QoQ Remarks
Revenue 6,483 7.5% -6.3% Growth at Braintree is offset by exiting e-bay customers. Lower take rate due to exiting high take rate eBay customers.
EBIT 711 -34.2% -31.1% higher portion of TPV generated through Braintree by bill pay partners, large merchants, and other marketplaces, which generally pay lower rates;
Net profit 509 -45.6% -43.3% higher tax and other expenses
EBIT margin 11.0% (690) bps (390) bps higher transaction expenses, higher T&D as well as G&A expenses partially offset by lower sales and customer support expenses.
NPM 7.9% (760) bps (510) bps negative operating leverage
Major Segments Rev. (USD Mn) 1QCY22 YoY % of Total Remarks
US Revenues 3,671 19.3% 56.6% primarily driven by Venmo and Braintree partially offset by exiting eBay customers and lower take rate
International Revenues (const. curr) 2,812 -5.0% 43.4% exiting eBay customers and lower take rate
Outlook
– Revenues: US e-commerce growth was estimated at 10% for CY22 at the beginning of the year, however, now it seems it will be lower than 10%. PYPL being one of the largest e-commerce payment processors, will likely grow in line with the e-commerce market in CY22. In H2CY22, Paypal is launching its payment service on Amazon. Apart from Credit cards and Amazon’s in-house payment methods, PYPL will be the first and only payment option available. We expect this to contribute materially to active user growth. As the last of the eBay users roll off in Q2CY22, comps will improve in H2CY22 which will mostly be core PayPal and Venmo. Take rate is expected to decline mid to high single digits bps in CY22 as higher take rate eBay users roll-off. Checkout and Digital Wallet are the two largest opportunities for PYPL.
– EBIT: Expect EBIT margins to decline from 17% in CY21 to 12% in CY22 and grow to 13% in CY23. The decline in EBIT margin in 2022 is driven by the lapping of 125 bps of credit reserve release and provision built from more normalized credit growth partially offset by operating leverage.
– EPS: CY22 is a reset year for PYPL. It will reset to growth from CY22 onwards since CY22 will see a YoY decline in EPS from a reduction in operating margins. Margins may not improve much in CY23 since a large chunk of its expected growth is from low-margin customers that will be replacing the high-margin eBay customers. Unless revenues grow much quicker than the expected 10-15% range, operating leverage may not help much in boosting EPS growth.
-TAM: PYPL is expected to add 10 mm Net New Accounts (NNAs) in FY22. It already added 2.4 mm NNAs in Q1CY22 in spite of the reduction in eBay customers. The eBay customer exits will be completed in Q2CY22 and hence H2CY22, PYPL could see higher YoY NNA growth. Venmo is in the process of integrating with Amazon and will be one of the default payment options on US Amazon checkout; we expect double-digit NNA growth as well as TPA & revenue growth once AMZN integration is complete in Q4CY22.
Valuation
PYPL currently trades at 26x CY23 PE with a 3% EPS CAGR for CY21-23. With CY22 being a reset year, as growth continues in double-digit from CY23 onwards, PYPL doesn’t seem to be expensive and if AMZN-related growth materializes from CY23 onwards, the current decline in PYPL stock price will prove to be a good buying opportunity.

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