PayPal (PYPL) – Reflecting on a Tough Quarter – February 10, 2024
This was a tough PayPal quarter. Its messaging confused investors about the impact of its stock comp accounting change on 2024 EPS guidance. It also set a goal for flat Y/Y transaction margin (similar to gross margin) dollar growth, which is disappointing to say the least. I was patiently waiting for a transaction margin bottom to get aggressive once more on building out the position. That came this quarter, but did not motivate me to add more shares. Why the change of heart? Flat transaction margin dollar growth in 2024 means the margin trough will be a one-off event rather than a permanent, convincing inflection. It needs to be the latter.
I’ve said repeatedly that this turnaround will take time. I’ve said over and over again that there was too much excitement surrounding Q4. Broken record alert: This is not Meta 2.0. There’s much more to fix, steeper competition, and a bigger mess left behind by the poor decision-making of prior leadership.
A branded checkout re-acceleration cannot happen overnight; small business private label traction can’t be built overnight; Braintree can’t deliver a margin explosion overnight; PayPal cannot rapidly accelerate active user growth overnight. The company under-invested in key initiatives like checkout modernization, ignored the mobile commerce revolution, disregarded its massive data edge, chased cash burning, lower value account growth, dawdled on innovation and improperly integrated M&A for years. All of these things will take time to fix. And all of these things are the fault of Dan Schulman and his old team.
This quarter was not Alex Chriss’s fault and it was never going to be amazing. He has been at the company for 3 months. Give him at least a few quarters. Some pointed to his sober tone on the call as being negative, but these were the same folks criticizing him for being overzealous in previous interviews. Pick a lane.
At the same time, I’ve also said many times that my PayPal expectations will ramp throughout 2024. That’s no longer an opinion, but a prerequisite for me to stay invested in this business. Q4-2023 must represent the kitchen sink quarter, and I think that it will. On the call, leadership explicitly told us that the guide leaves out any assumed value creation from new initiatives. It wants to “put points on the board” before assuming those points will come and wants to “rebuild a reputation” for delivering on promises. Reading through the tea leaves, the tone makes me think that management is sandbagging to set a new CEO up for an easy year of over-delivering (like it should). And again, that must be the case. These initiatives need to start bearing fruit because that’s the only way transaction margin dollar growth can resume steady multi-year compounding. Without that resumption, profits cannot grow for much longer.
I think PayPal will deliver a turnaround. But? My patience and confidence levels are dwindling. I want to see Chriss and company prove that the foundation for a turnaround has been laid. I’d much rather resume adding at $70 per share with a clear investment case than to do so today with all of the uncertainty.
The only thing I’d pick on Chriss for is reinvesting all of the cost savings into more product enhancements. I would have loved for him to earmark a portion of those savings for net income growth in 2024. Especially considering it already has the balance sheet and then some to fund any R&D. Still, I loved the accounting change, the new disclosures, the call dialogue and what I view as a guide that will turn out to materially under-promise. I also love that PayPal rolled out product releases in a microscopic fraction of the time it took the old team to do so. They’re doing the right things. They need to keep doing the right things. They need these things to deliver tangible financial value. We’ll see.
As an aside, I’ve reached out to my contacts at PayPal about the 2024 EPS guide confusion. The $5.10 guide can be translated in two ways. First, that it excludes $1.6 billion in stock comp add-backs, which were added back in 2023. This would make the $5.10 2024 guide a little more than $1 higher vs. 2023 on an apples to apples basis. The other way to translate is that the add-back was still in the 2024 guide and will be excluded later on. That would make the $5.10 2024 guide a little more than $1 lower vs. 2023 on an apples to apples basis. I think the former is true, but I’ll keep you posted.