PayPal Just Raised Its Profit Forecast, and the Stock Barely Moved. Here’s Why

PayPal's latest earnings report showed impressive results with adjusted EPS growing by 8% year-over-year and the company raising its full-year profit guidance. However, the stock only saw a modest 1% increase in value following the report. This discrepancy has investors wondering what's really going on at PayPal.

Revenue grew by just 2% to $8.58 billion in the third quarter, which was below expectations. Transaction margin dollars, a key gross profit indicator, only increased by 2%. The real concern lies in PayPal's branded checkout, which makes up a significant portion of their profits but has seen a decline in payment volume growth for the fourth straight quarter. In fact, branded checkout growth has been hovering between 1% to 2% for that period.

PayPal's transaction take rate, the percentage of revenue it keeps, has also declined from 1.64% to 1.58%. Management is only forecasting slight growth in transaction margin dollars for the upcoming quarter. While Venmo, PayPal's mobile payment service, is doing well with a 14% year-over-year payment volume growth, other parts of the business are not performing as strongly.

Management's focus on cost-cutting and stock buybacks has helped drive earnings growth, as seen in the company's 8% EPS increase. However, these measures are not providing the same level of quality earnings growth that investors expect from a strong core business. Currently, PayPal trades at just 10 times its expected 2026 earnings, indicating that there is limited growth priced into the stock.

Investors are eager for branded checkout to show stronger growth, but there is concern about whether PayPal can deliver on this front. Until this happens, any earnings beats driven by expense reductions and buybacks are unlikely to significantly impact the stock price. The author plans to closely monitor branded checkout volume in the coming quarters while holding onto their shares.