PayPal shares collapsed 10% after the report. Investors were upset by a key metric

Shares of fintech service PayPal fell 10% in trading on July 29, which was the strongest collapse in almost six months. The company reported well for the second quarter: revenue and earnings per share increased, PayPal also improved its EPS forecast. But investors paid attention to the slowdown in growth of the key profitability indicator. Analysts say that the market reacted too sharply, and are not in a hurry to write PayPal off.

PayPal's share price in Tuesday's trading dropped to $70.31 - that's 10.1% below its closing level a day earlier, and the lowest level in a month (since June 23). The rate of decline for the day was the highest for the securities in almost six months - since Feb. 4, noted Bloomberg. Prior to the July 29 collapse, PayPal's securities were up for nine consecutive trading sessions, the longest such streak in four years.

PayPal reported that its second-quarter revenue rose 5% to $8.29 billion, which was better than the $8.08 billion forecast by LSEG (as reported by CNBC). Adjusted net income came in at $1.37 billion, or $1.4 per share - also above forecasts ($1.3 from LSEG). In addition, total payments volume added 6% to $443.5 billion: the company exceeded analysts' expectations here ($435.7 billion according to Bloomberg), although the number of transactions declined. PayPal is seeing a "slight slowdown" in consumer spending, Bloomberg wrote, citing CFO Jamie Miller's comments to analysts.

PayPal also raised its outlook: it expects adjusted earnings per share for the year in a range of $5.15 to $5.3, up from the previous range of $4.95 to $5.1. That's a significant improvement in expectations: analysts polled by FactSet were hoping for $5.11 per share - that's less than even the lower end of the new range, noted Barron's.

The fintech service reported a slowdown in growth in a key metric of its profitability - transaction margin dollars (transaction margin dollars), which shows how much a company makes on transactions after costs are deducted, wrote CNBC. The metric was up 7% (to $3.84 billion), compared to +8% in the first quarter. However, PayPal achieved its sixth consecutive quarterly increase in the metric. The revenue growth allowed the company to raise its full-year guidance for it: to $15.35-15.5 billion (assuming 5-6% growth) instead of $15.2-15.4 billion (+4-5%). But it will only increase by about 4% in the third quarter, CNBC reports.

In addition, the company's expenses increased and free cash flow decreased. Operating expenses totaled $6.78 billion compared to $6.26 billion in the first quarter. And adjusted free cash flow of $656 million is only about a third of what Wall Street expected to see, CNBC reported. By comparison, the first quarter was $1.4 billion.

The rise in transaction margin dollars beat the forecast of Mizuho analyst Dan Dolev, who expected 5%, reported MarketWatch. However, that was due to a "one-time benefit from renewing and expanding a relationship with a key payment partner," the analyst says. Nevertheless, he remains optimistic about the company: there are "some factors present right now that are hurting the stock," but PayPal's "strong fundamentals should ultimately outweigh," he said.

Barclays analyst Ramsey El-Assal said the stock was "lower than it should be" given the "generally solid" quarterly results, MarketWatch reports.

JPMorgan highlighted weak growth in branded checkout (purchases using PayPal tools) volume, which was 5% - below the service's own estimates and "slightly below investor expectations," reports Barron's. Given that, and the fact that "the forecast upgrade looked widely expected," the bank expected the stock to decline in the first hours after the report, the publication added. Investors have also voiced their concerns about this PayPal business, which faces competition from Apple Pay and other payment services, MarketWatch noted.

However, JPMorgan believes the reporting was better than expected, and a "healthy" increase in the annual forecast balances out weak trends in payments, Barron's said. JPMorgan on Tuesday reaffirmed its Overweight rating for PayPal's securities ("above market", consistent with a buy recommendation).

PayPal shares have a total of 44 ratings from analysts who disagree, with roughly equal parts advising Hold (21 Hold recommendations) and Buy (16 Buy and four Overweight), shows MarketWatch. Another three think the securities are worth selling (Sell). The average target price is $82.66, up 6% from the closing price on July 28.

This article was AI-translated and verified by a human editor