Is PayPal Stock A Buy After Earnings? (NASDAQ:PYPL)

Elevator Pitch

My Buy rating for PayPal Holdings’ (NASDAQ:PYPL) stock remains unchanged.

With my prior article for PYPL written on December 15, 2022, I analyzed PayPal’s growth prospects in 2023. My latest write-up shines the spotlight on PYPL’s most recent Q4 2022 financial results and the company’s revised management guidance for this year.

PayPal’s actual fourth quarter bottom line performance surprised the market in a positive manner, and the company has raised its earnings growth expectations for the current year. Also, PYPL’s BNPL (Buy Now Pay Later) and branded checkout businesses have done pretty well in 2022 and this year thus far, which makes me more confident in the company’s business outlook. Therefore, I have chosen to maintain my Buy rating for PayPal’s stock.

What Were PayPal’s Expected Earnings?

Prior to PayPal’s quarterly results disclosure on February 9, 2023 after the market closed, the sell-side analysts covering PYPL’s shares had forecasted that the company would post a Q4 2022 normalized earnings per share (or EPS) of $1.20. If Wall Street was right, this would have translated into a +11% QoQ and +8% YoY bottom line expansion for PayPal in the last quarter of the prior year.

I will discuss how PYPL exceeded the market’s expectations with its fourth quarter earnings in the subsequent section of this article.

Did PayPal Beat Earnings?

PYPL did deliver an earnings beat for the fourth quarter of 2022.

The actual non-GAAP adjusted EPS for PayPal grew by +12% YoY and +15% QoQ to $1.24 in the final quarter of the previous year. More importantly, PYPL’s Q4 2022 bottom line came in +3% and +4% above the market’s consensus EPS estimate of $1.20 and management’s earnings guidance of $1.19, respectively. PayPal attributed its better than expected earnings for Q4 2022 to “cost discipline and the pursuit of profitable growth” at the company’s most recent quarterly results briefing.

Apart from headline metrics like EPS, there are also other relevant metrics that investors should watch closely, which I highlight in greater detail in the next section.

PYPL Stock Key Metrics

I noted in my earlier mid-December 2022 update that “better-than-expected share gains and faster-than-expected BNPL growth” will be the key 2023 catalysts for PayPal. Certain metrics revealed by PYPL at the recent Q4 2022 earnings call and results presentation support my thesis.

PYPL mentioned at the fourth quarter earnings briefing that its “branded checkout volumes grew by 5%” in 2022 which “is following the shape of the e-commerce (i.e. in line with market growth rate).” In other words, it is highly probable that PayPal’s branded checkout business didn’t lose e-commerce market share last year.

Separately, PayPal revealed in its Q4 2022 financial results presentation slides that its number of BNPL transactions and transaction volume surged by +200% and +160% to 147 million and $20 billion, respectively for full-year 2022. Furthermore, the growth of BNPL has had a positive spill over effect; the company’s internal data outlined in its earnings presentation showed that clients who utilized PYPL’s BNPL offerings “spend 30% more with PayPal” on average.

What To Expect After Earnings

On the back of its Q4 2022 EPS beat, PayPal has revised the company’s 2023 financial guidance upward in a significant manner.

In early-November 2022, PYPL was guiding for a +15% increase in normalized earnings per share and a +1.00 percentage point improvement in normalized operating profit margin for 2023. With the release of its FY 2022 results last Thursday, PayPal’s updated 2023 management guidance points to a +18% normalized EPS growth and a +1.25 percentage point expansion in normalized EBIT margin. The market doesn’t disagree with company management, considering that the current fiscal 2023 consensus bottom line growth rate projection is +17.9% according to S&P Capital IQ data.

There are two key takeaways from management’s comments at the most recent Q4 2022 investors call that provide support for expectations of PYPL achieving robust earnings growth in the current year.

The first key takeaway is that PYPL’s performance in the first half of Q1 2023 seems to be pretty good. PayPal witnessed “widespread acceleration both in January and February” 2023 for its branded checkout and BNPL businesses as per PYPL’s fourth quarter earnings briefing management commentary.

The second key takeaway is that PayPal’s actual fiscal 2023 financial performance might be even better than what the company is currently guiding for. At its most recent quarterly results call, PYPL stressed that it hasn’t incorporated “any recent positive economic news into” its 2023 management guidance. According to a recent February 10, 2023 Reuters news commentary, Citigroup’s (C) economists have lowered their estimated probability of a 2023 “global recession” from 50% previously to 30% now, which is aligned with PYPL management’s views that the outlook for the economy is improving.

Is PYPL Stock A Buy, Sell, or Hold?

I maintain my Buy rating on PayPal. PayPal’s current consensus forward next twelve months’ normalized P/E multiple of 16.6 times (source: S&P Capital IQ) is still way lower than its three-year and five-year average forward P/E ratios of 38.4 times and 36.6 times, respectively. PYPL’s P/E multiple is likely to expand in the future, as the company’s financial performance improves in time to come.