PayPal’s ‘once beloved story’ is ‘back in vogue’ despite some noise

The stock fared better later in the month after Amazon.com Inc.
AMZN,
-5.52%
announced that it was finally beginning the rollout of a Venmo payment option on its U.S. e-commerce site. PayPal first teased the partnership last fall.

Both items, at the very least, won’t have affected PayPal’s latest results, since they occurred after the third quarter wrapped. And they may not end up financially impacting the company too much on a longer time horizon either.

Jefferies analyst Trevor Williams wrote shortly after the “Delete PayPal” controversy that the scale of social-media activity didn’t indicate PayPal was likely to suffer “any noticeable impact on net new active accounts” as a result of the backlash.

Meanwhile, Bernstein’s Harshita Rawat wrote that the Venmo button on Amazon is probably “empty calories in terms of gross-profit contribution.” While Amazon “likely doesn’t have a big conversion problem,” the move may simply be a bigger deal as far as getting consumers used to the idea of seeing Venmo as a payment mechanism in the e-commerce world.

The bigger issue for PayPal in its Thursday afternoon report will be how it progresses on a story that’s been playing out all year. After a series of guidance cuts on various metrics, analysts got the sense in the wake of PayPal’s most recent report that the company finally faced a more achievable bar. The question now is whether the company can clear it and set an encouraging tone for the year ahead.

“With e-commerce now having lapped the largest COVID stimulus impacts and elevated inflation still not driving a meaningful shift away from discretionary spend, industry data suggests growth has likely improved in 3Q relative to last quarter’s 7% census bureau e-commerce growth (6% ex-AMZN),” wrote Morgan Stanley’s James Faucette.

While there’s still risk from inflation and economic issues, improving trends “would mark progress in our view in easing investor concerns around normalized industry growth returning to double-digit levels,” he continued.

PayPal’s results come in the wake of those from American Express Co.
AXP,
-0.92%,
Visa Inc.
V,
-0.11%,
and Mastercard Inc.
MA,
+1.53%
All three companies pointed to healthy spending dynamics, though PayPal’s business is relatively more exposed to discretionary categories, so Wall Street will be looking to see if the company’s trends were any different.

Additionally, executives typically provide some early look to the next fiscal year on the third-quarter call. The eventual 2023 view is one reason why SMBC Nikko Securities America analyst Andrew Bauch titled his recent PayPal report: “A Once Beloved Story Back in Vogue.”

Though PayPal still faces a tall order, in his view, as it seeks to execute a turnaround, the company “checks several boxes in what investors prefer in the current market environment” in that it’s “one of the only names in the FinTech universe optimally positioned to accelerate top-line growth in 2023.”

The company’s top-line growth is only part of the narrative. Amid a beatdown for PayPal shares, which remain down more than 50% on the year, executives acknowledged last quarter that they were in dialogue with activists at Elliott Management Corp., who have invested in the company. PayPal Chief Executive Dan Schulman said in conjunction with the most recent report that the two parties were “completely aligned in our mutual goal to maximize shareholder value.”

Among the company’s recent initiatives is a cost-savings plan, as executives target at least $1.3 billion in expense savings in 2023.

“Given investor demand for earnings growth, we believe management raises these expectations to a $1.5 billion 2023 annualized run-rate within the next several quarters,” Bauch wrote.

Barclays analyst Ramsey El-Assal agreed that “investors will also be looking closely at PYPL’s ability to harvest expense savings (potentially in excess of guidance).” For that reason “progress against PayPal’s $900 million 2022 opex savings target (and a potential read-through to 2023’s larger annualized target) will be of importance,” he continued.