PayPal raises 2024 profit forecast for second time; branded payment growth exceeds expectations

PayPal (PYPL.O) on Tuesday raised its full-year adjusted profit forecast for the second time after its branded payments business beat expectations and eased concerns about competition, prompting a 9% surge in its shares in morning trade.

Tech giants Apple (AAPL.O) and Google parent Alphabet (GOOGL.O) have expanded their digital payments offerings in recent years, causing fears among analysts and investors that they could dent PayPal's market share in its core business.

"If you focus on desktop/web, which accounts for 40% to 50% of all payments, we don't see any degradation in our share over the last four years. We've maintained share despite competition," CEO Alex Chriss said on a call with analysts, responding to a question about the growing adoption of Apple Pay.

U.S. consumers have also remained remarkably resilient despite feeling the pressure of higher utility and credit card bills. PayPal is betting on continued spending resilience during the crucial back-to-school season and the upcoming holiday shopping season.

The company now expects adjusted profit growth in the "low to mid-teens percentile" by 2024, compared to its April forecast of a "mid-to-high single-digit" increase.

Its adjusted earnings per share rose to 1TP4Q1.19 in the three months ended June 30, up from 87 cents a year earlier.

"While a hit to gross profit was expected, the magnitude of the positive result came as a surprise," said analysts at Jefferies.

Total payment volume increased by 11% to $416.81 billion in the second quarter, while revenue rose by 9% to $7.89 billion on an FX-neutral basis.

REVOLUTION IN PROCESS

Alleviating some investor concerns that have weighed heavily on the stock, total payment volume in branded pay grew by approximately 6% in the second quarter.

PayPal said branded payment, Braintree and Venmo contributed to the highest rate of growth in transaction margin dollars since 2021. Margin dollars are a key measure of the profitability of its core business.

CFO Jamie Miller said on a call with analysts that the company expects lower volume and revenue growth during the second half of the year, in line with its plan to prioritize high-quality profitable growth.

"This is deliberate and shows good progress," he said.

Transaction margin dollars increased 8% in the quarter to $3.61 billion, beating expectations for a gain of nearly 1%.

"We've returned the company to transaction margin growth, we've returned the company to consumer user growth, we've significantly improved Braintree's profitability and we're accelerating Venmo," Chriss said.

PayPal's operating margins expanded 231 basis points on an adjusted basis to 18.5% in the quarter, thanks to cost cuts and restructuring efforts.

Collaboration: Grupo Auge | Reuters (International).