PayPal Holdings, Inc. (NASDAQ: PYPL) reported stellar first-quarter earnings, exceeding analyst expectations on its top and bottom line, as a fast-growing e-commerce industry boosted its quarterly growth. However, all was not as good as it seemed, as investors drove the share price down by 5.59% in after-hours trading. 

PayPal grew its first-quarter revenue by 8.6% on a yearly basis to $7.04Bn, exceeding the $6.99Bn analyst consensus. Their bottom line told a similar story, as adjusted earnings per share came in at $1.17, up from $0.88 in the same quarter last year, while analysts expected a figure of $1.10. With the solid quarterly performance, the mystery of the after-hours share price drop was hidden in management’s guidance for the upcoming quarter, which was more conservative than the bulls would have hoped. 

Technical 

The 1D chart has a bearish signal as a descending triangle pattern emerges. After losing 62% of its value in 2022, the company has started the recovery process, but technical indicators signal more potential downside following the release. The pre-market gap down could result in an opening price around the triangle support, where a breakdown could be on the cards.  

If the support at $70.88 fails to hold, the bears could enforce momentum in a bearish shift toward lower support at the psychological level of $67.53. Conversely, if support does hold, the bears could look to capitalise on the valuation drop, opening the possibility for a retest of the 23.6% Fibonacci retracement at $72.69. A successful breakthrough could lead them toward the pivot resistance at $74.33, where high volume may be needed to move out of the triangle sustainably toward $76.51 and $79.59, the 38.20% and 50% Fibonacci retracement levels.  

From current levels, there is a 32% potential upside to the estimated fair value of $92.71, where the possible bearish breakdown could open up more attractive potential entry points for the bullish investor who believes in the company’s growth story. 

Fundamental 

Aiding the solid quarterly performance was their total payment volume (TPV) of $354.5Bn, showing a 10% expansion from the previous year’s quarter, while their total transactions grew 13% to 5.8Bn. Their number of active accounts went up 1% to 433M, while their transactions per active account rose from 47 to 53.1. These metrics show resilience in their customer base as their users engage in more transactions. However, as the US economy starts slowing down, we could see a cutback in consumer spending as the global economy approaches a recession. With persistent inflation and higher interest rates, the company’s top-line growth is at risk of a significant economic downturn. Management’s guidance reflected these risks, as they guided cautiously for the upcoming quarter. 

For the second quarter of their fiscal year, management projected EPS growth in the range of 24%-26% on net revenue growth of 6.5%-7.%. Growth in this range would result in quarterly EPS of $1.15-$1.17, which concerned the market, as analysts predicted a $1.17 projection at the higher end of the actual range. For the full year, management expects earnings per share to reach $4.95, up from the previous $4.87 projection and beating the $4.89 market expectation. Overall, the near-term growth outlook looks dim, as the macroeconomic environment is expected to affect the company’s performance.  

In recent years, PayPal has struggled significantly to return value to its shareholders. The graph below indicates a measly 1.14% total return over the last five years, severely underperforming its peers like Mastercard and Visa, who have dished out 109.50% and 85.70%, respectively, over the same period. While its poor share price performance has tempted the market into considering its current valuation, the P/E multiple indicates that it remains relatively overvalued compared to other players, with a 36.1X ratio. Only Mastercard operates with a higher multiple, but its PEG ratio suggests that a premium could potentially be justified for its growth prospects. In this regard, PayPal falls short again, operating with a 2.58X PEG ratio, with only Fiserv, Inc operating with a higher multiple of 3.05X. 

Summary 

While PayPal reported solid quarterly earnings, management’s dim outlook for the upcoming quarter, along with its poor share price performance and relatively high valuations, do not sit well with investors. However, their CEO Dan Schulman recently announced his retirement, along with several key members leaving the company, opening up the possibility for a fresh management team to continue the company’s growth in a well-positioned industry. If they can unlock the incremental value hidden in the fintech industry, the company’s share price has a 32% potential upside to the estimated fair value of $92.71. 

Sources: Koyfin, Tradingview, Reuters, Yahoo Finance, PayPal Holdings, Inc.