Earnings Outlook: Is PayPal about to cut its forecast yet again?

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PayPal Holdings Inc. has been bringing down expectations all year. Is the company done yet?

Executives in November shared a rough prediction for 18% revenue growth this year, but they lowered that estimate to 15% to 17% in January. Then in April, they trimmed the forecast to 11% to 13% growth. That’s not to mention PayPal’s PYPL, +0.78% withdrawal of its medium-term outlook, which targeted a 20% compound annual growth rate on revenue over a five-year span.

Bernstein analyst Harshita Rawat wonders if another cut to PayPal’s revenue guidance is in store when the company posts results Tuesday afternoon. She noted that PayPal executives have most recently called for 15% to 17% revenue growth when excluding impacts from eBay Inc. EBAY, +0.87%, which has been in the process of migrating to its own managed-payments system. That latest forecast is below the 19% to 21% that the management team had been predicting at the start of the year.

But even the new forecast “looks rather rosy against a backdrop of worsening e-commerce trends, uncertain macro, persistent inflation and strengthening dollar,” Rawat wrote. “We believe it is likely that we see another guidance cut.”

How PayPal shares would react to such a move “is another matter,” she wrote. “We are inclined to believe that a guidance cut might be dealt with gently by investors and intact guidance/numbers beat could be handsomely rewarded (in the stock).”

PayPal shares traded more than 11% higher following the company’s most recent earnings report, which brought lowered guidance and the termination of the medium-term outlook. And the stock is fresh off its best month since May 2020, despite some downbeat signals about the strength of e-commerce growth. Helping matters is that activists at Elliott Management reportedly took a stake in the company.

See also: Shopify stock sinks amid layoff plan as CEO admits, ‘I got this wrong’

Jefferies analyst Trevor Williams was more optimistic than Rawat about the prospect that PayPal could maintain its prior revenue forecast, though he was hardly effusive. In his view, PayPal’s latest outlook “built in enough cushion for incrementally weaker trends,” which lowers the odds of a further reset.

An “in-line print and preserving the low-end of guidance is probably good enough, but don’t expect renewed enthusiasm,” Williams wrote.

Barclays analyst Ramsey El-Assal deemed PayPal’s recent guidance changes “pragmatic” given economic pressures, though he said he believed that “the buy-side is not entirely convinced—given the difficult macro environment—that PYPL won’t need to recalibrate numbers again.”

Investors have been “largely on the sidelines” when it comes to PayPal, and El-Assal thinks “the Street will become more constructive after the company consistently meets shorter-term goals over multiple quarters.”

What to expect

Revenue: Analysts tracked by FactSet expect PayPal to report revenue of $ 6.78 billion, up from $ 6.24 billion a year before. According to Estimize, which crowdsources projections from hedge funds, academics, and others, the average estimate calls for $ 6.8 billion.

Earnings: The FactSet consensus models a decline in adjusted earnings per share to 87 cents from $ 1.15. Those polled by Estimize are looking for 88 cents a share on average.

Stock movement: PayPal shares have declined following three of the company’s last four earnings reports. They’ve also made double-digit moves following the past three reports.

The stock has had a difficult year, falling 54.1% so far in 2022, compared with a 13.3% decline for the S&P 500 SPX, +1.42% over the same span.

Analysts remain largely bullish on the name. Of the 50 analysts tracked by FactSet who cover PayPal, 35 have buy ratings, 14 have hold ratings, and one has a sell rating. The average price target is $ 109.38.

What else to watch for

RBC Capital Markets analyst Daniel Perlin sees a variety of puts and takes headed into Tuesday’s report.

“On the [positive] side of the ledger, we believe higher interest rates could provide upside to its float portfolio, strength in travel bookings remains healthy, and focus on engagement could offer some proof-points this quarter, he wrote. “On the flipside, the [negatives] include greater FX [foreign-exchange] headwinds, inflationary pressures,” as well as potential discretionary spending issues for lower-income customers and a less robust trajectory for the e-commerce category in the short run.

Read: PayPal is ‘one of the more recession-sensitive names’ in payments, analyst says in downgrade

PayPal surprised Wall Street earlier this year when executives said they would de-emphasize growth in net new active accounts, which had been a key metric for the company. While PayPal would still look to bring in new accounts, executives would focus more on driving additional activity among higher-value users rather than motivating less engaged ones to stay on board.

Though El-Assal of Barclays said that user growth for PayPal isn’t strongly correlated with growth in its payment volumes, he thought that nonetheless “investors should be prepared for Q2 account growth in the mid-single digits vs. ~9% in 1Q22 and midteens growth throughout FY21.”

Another factor to watch will be the performance of PayPal’s buy-now-pay-later offerings.

Don’t miss: PayPal expands BNPL offerings with monthly-payment option

“PayPal’s Pay in 4 has seen limited growth among the checkout pages of the merchants we track, and when we looked across players, we found that 28% of Pay in 4 merchants also accepted another BNPL provider,” Morgan Stanley’s James Faucette wrote. “We think it probably makes sense for PYPL to work toward integrating other BNPL options (Affirm AFRM, +3.91%, Klarna, etc.) into its branded checkout option.”