PayPal's quarter was OK, but guidance was the reset lower that we expected

Published Wed, Apr 27 20229:30 PM EDTUpdated Wed, Apr 27 20229:40 PM EDT

PayPal (PYPL) reported a fine first-quarter 2022 result Wednesday evening, but the cut to guidance is what will get the most attention. As for the quarter, net revenues increased 8% year over year to $6.5 billion, a beat compared to estimates on FactSet of $6.4 billion. The 28% year-over-year decline in adjusted earnings per share to $0.88, which included a 3 cent hit from suspending transactional services in Russia, matched estimates. Bottom line Overall the quarter looked OK, but it's too hard to ignore the outlook reset. The good news is that every investor involved in the stock should have known that a cut was coming, meaning that a lot of bad news was already in the stock price. This explains why PYPL was rallying more than 3% after-hours despite management lowering the boom in guidance. To be clear, not everything from the conference call was negative. We appreciate some of management's talk about prioritizing ways to increase operating leverage and improve operating efficiency because the rising interest rate environment means you must put your investment focus on stocks of companies with profitable growth. However, we cannot give management any credit for this pivot until we see the proof of execution due to their previous shortfalls. But back to guidance, it's a little difficult to distinguish how much of the reset was based on a weakening macro environment versus bad forecasting versus plain old poor execution. Nonetheless, the conclusion is all the same. The low visibility and trust in what the company will deliver this year, high multiple relative to a reduced growth rate, and no dividend have made PYPL very difficult to continue owning. Thus raising the question: Can our money be put to better work elsewhere? We will continue to evaluate this position. Key Q1 quarterly metrics Total payment volume (TPV), a closely watched metric in the payments space, increased 13% on a spot basis and 1% a foreign exchange-neutral basis (FXN) to $323 billion, a slight beat versus the $322.6 billion the street was looking. Excluding eBay, TPV increased 17% on a spot basis and 19% FXN. PayPal added 2.4 million net new active accounts (NNAs) primarily by Venmo, bringing the total number of active accounts to 429 million as of the end of the quarter. Engagement was up with payment transactions per active account increasing 11% year over year to 47.0. Total take rate , which is simply total revenue divided by TPV, of 2.01% was lower by 10 basis points year over year and the transaction take rate of 1.86% was down 11 basis points year over year. Volumes at Braintree, a provider of e-commerce tools for businesses, increased 61% in the quarter with growth driven by partnerships with Airbnb , Uber , DoorDash , LiveNation, Vineyard Vines, and TikTok. Venmo revenues increased 60% year over year and volumes grew 12% to $58 billion. The P2P platform now has more than 85 million accounts in the United States. On Buy Now, Pay Later (BNPL), PayPal did $3.6 billion worth of volume in the quarter with over 18 million consumer accounts using this funding option since PayPal first launched it. Free cash flow came in at $1.05 billion, down 32% year over year, and missing expectations of $1.4 billion. It's also worth noting that PayPal repurchased roughly 11 million shares in the quarter at an average price of $133.93 — about $1.73 billion in total — in what looks to be a terrible waste of money. The stock closed Wednesday at $82.61. Reset guidance After PayPal failed to reaffirm its outlook following the April 12 announcement that CFO John Rainey was departing the company to join Walmart , speculation has been growing that management would reset, or lower, its 2022 outlook on its next earnings report. Those fears came true Wednesday night with cuts across the board. But the stock was not falling on the news. In fact, as noted earlier, it rose after hours because the market saw it coming and had already punished the stock for it. Relative to early February, CEO Dan Shulman said on the conference call that "the macro environment has deteriorated" due to increased global uncertainty and incremental inflationary and supply chain pressures. Additionally, management acknowledged that forecasting normalized consumer e-commerce spending in a reopened economy has become too complex. Therefore, they believe it is "prudent" to lower guidance. For 2022, PayPal now expects revenue to grow 11% to 13%, down from 15% to 17%, on a spot basis and 15% to 17% foreign exchange neutral. Excluding eBay, which seems to be a seemingly never-ending unwind, management expects revenues to grow 15% to 17% — down from 19% to 21% — on a spot basis. Adjusted operating margins are now expected to be 20%, down from a previous view of 23%. On earnings, PayPal expects adjusted EPS to be in the range of $3.81 to $3.93, down from the prior guide of $4.60 to $4.75, and well below estimates of $4.62. This new outlook includes a headwind from reserve releases and taxes. At the midpoint of this new guide, PYPL currently trades right around 22x earnings. Net new active account growth is expected to be 10 million compared to the previous outlook of 15 million to 20 million as management continues to focus on driving sustainable high quality growth and increasing revenue per active account while pulling back on incentive driven campaigns with low ROI, which is short for return on investment. TPV growth was revised lower to 13% to 15% from 19% to 21% at spot and 15% to 17% from 21% to 23% foreign exchange neutral. PayPal also expects to generate more than $5 billion of free cash flow this year, down from its previous view of $6 billion. For the second quarter of 2022, management is guiding to revenue of $6.8 billion — 9% year over year growth at spot and 14% growth ex-Ebay — compared to estimates of $7.1 billion and adjusted EPS of $0.86 compared to estimates of $1.12. Lastly, management withdrew the medium term revenue and earnings targets they provided at their Investor Day in February 2021. Recall their NNA target was pulled last quarter. (Jim Cramer's Charitable Trust is long PYPL and WMT. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . 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Dan Schulman

Mark Neuling | CNBC