• 9M23 revenue/adj. PATMI was within expectation at 74%/73% of our FY23e forecasts. In 3Q23, revenue rose 8% YoY to US$4bn driven by 15% YoY surge in total payment volume to US$388bn. Venmo’s payment volume grew 7% YoY to US$68bn.
• For 4Q23e, PayPal expects total revenue to grow by 7.5% YoY to US$7.9bn. Gross margin pressure is expected to continue due to a business-mix shift towards unbranded checkout solutions like Braintree. Adj. EPS is expected to grow by 10% YoY to US$1.36 led by higher operating leverage.
• We maintain a BUY recommendation and nudge our DCF target price to US$101.00 (prev. US$98.00) using a WACC of 7% and terminal growth rate of 4%. Our FY23e revenue estimates remain unchanged, while we increase our EBITDA by 1% to reflect lower expenses. PayPal enjoys long-term tailwinds from two-sided network effects, a secular shift to cashless payments, as well as Venmo monetization initiatives like Tap to Pay and a payment option on Amazon.

The Positives

+ Higher payment volumes. In 3Q23, PayPal’s total payment volume (TPV) surged by 15% YoY to US$388bn, driven by resilient consumer spending on its platforms (Braintree, PayPal branded checkout, and Venmo) amid moderating inflation. In 3Q23, PayPal delivered 32% YoY growth in unbranded processing volumes (Braintree), while branded checkout volumes grew by 6% YoY. Venmo’s TPV grew 7% YoY to US$68bn. We believe that the addition of Venmo as a payment option on Amazon’s check-out page will likely accelerate PayPal’s overall payment volumes.

+ Boost in transactions per active account. The number of transactions per active account rose 13% YoY to 57x in 3Q23 from 50x in 3Q22. This is a sizable increase given PayPal’s strategic decision to focus on driving higher engagement within existing active accounts instead of adding new accounts. PayPal is boosting customer engagements by adding new features like passkeys to allow frictionless payments, Tap to Pay on iPhone, and cryptocurrency buying and selling.

The Negative

– Drop in active accounts; gross margins remain under pressure. PayPal ended 3Q23 with 428mn active accounts, down 1% YoY. Management highlighted that this was mainly due to efforts to churn out lower-quality customers, particularly in Latin America and Southeast Asia. In addition, the gross margin fell to 45% in 3Q23 from 51% in 3Q22 due to strength in its lower-margin unbranded checkout solutions like Braintree.