PayPal's stock soars as earnings bring big positive surprise on this key number

By Emily Bary

The payments company boosts its outlook on numerous metrics, with its CEO saying PayPal is 'operating from a position of strength'

PayPal Holdings Inc. on Tuesday posted upbeat growth in transaction-margin dollars for its June quarter, surprising investors on a metric that gauges the company's ability to grow profitably.

Transaction-margin dollars, measuring the profitability of the payment processing business, have become increasingly important to PayPal (PYPL) investors lately in light of concerns about growth contributions from lower-margin revenue streams. PayPal showed progress in the second quarter, however, as transaction-margin dollars grew 8% to $3.6 billion in what was the company's best growth on the metric since 2021.

See also: Why PayPal's 'perplexing' stock got downgraded, while Block's got upgraded

Prior to the report, Mizuho's Dan Dolev had been expecting 3% growth, and he said the consensus was expecting flat growth. "We believe strength in transaction-margin growth could re-energize the stock," he wrote in his preview.

The stock was up 7.6% in morning action Tuesday and tracking toward its largest single-day percentage gain since it rose 10.3% on Nov. 10, 2022, according to Dow Jones Market Data.

The company said in its earnings presentation that branded checkout, Braintree and Venmo all contributed to the transaction-margin growth in the latest quarter.

PayPal now expects low- to mid-single-digit growth in transaction-margin dollars for the full year, whereas its prior outlook was for "slightly positive" growth. The company also boosted its outlook on other metrics, including adjusted earnings per share. There, the company now anticipates growth in the low to mid-teens, above a prior forecast that called for mid- to high-single-digit growth.

Read: Half of PayPal analysts are back to bullish for the first time since January

"We are operating from a position of strength, delivering for our customers and focusing on long-term profitable growth," Chief Executive Alex Chriss said in a statement.

For the third quarter, PayPal anticipates high-single-digit growth in adjusted earnings per share. The FactSet consensus of 98 cents implied that analysts were expecting an almost 25% decline in adjusted EPS for the third quarter.

PayPal's third-quarter revenue outlook calls for mid-single-digit growth on the top line. The FactSet consensus of $7.98 billion implied a projection for 7.5% growth.

Chief Financial Officer Jamie Miller said on the earnings call that while PayPal expects lower volume and revenue growth when moving through the second half of the year, that's a "deliberate" move.

"It shows good progress," she said. "By strategically focusing on price to value in areas like large enterprise processing within Braintree, we are driving transaction margin dollar improvements even on a lower volume growth."

In the second quarter, PayPal's revenue increased 8% to $7.9 billion. Analysts were modeling $7.8 billion.

PayPal logged net income of $1.13 billion, or $1.08 a share, up from $1.03 billion, or 92 cents a share, in the year-earlier period. On an adjusted basis, PayPal saw $1.19 in earnings per share, while analysts had been modeling 99 cents.

Payment transactions were up 8% to 6.6 billion in the second quarter, while total payment volume grew 11% to $416.8 billion. The company saw 11% growth in payment transactions per active account on a trailing 12-month basis.

The company anticipates that its Fastlane product, meant to speed up the process of guest checkout, will reach U.S. general availability during August.

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-Emily Bary

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07-30-24 1013ET

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