On Friday, Philip Securities adjusted its stance on PayPal (NASDAQ:PYPL), downgrading the stock to Accumulate from Buy. The firm also revised its price target for the company's shares to $75.00, a decrease from the previous target of $83.00. This decision follows PayPal's first-quarter 2024 performance, which showed a steady revenue growth of 9% year-over-year (YoY), while profit after tax and minority interests (PATMI) increased by 12% YoY, benefitting from higher operating leverage.
PayPal reported that its total payment volume (TPV) surged by 14% YoY, contributing to the revenue growth. Despite a slight 1% drop in active users to 427 million, the number of payment transactions per active user rose by 13% YoY. However, the company's gross margin experienced a contraction of 200 basis points YoY to 45%, influenced by a shift towards the lower-margin Braintree unit. Looking ahead, PayPal anticipates a 6.5% YoY increase in revenue for the second quarter of 2024, projecting figures around $7.8 billion.
While the firm maintains a positive outlook on PayPal's global user base and the ongoing transition to digital commerce, analysts have modestly adjusted their revenue estimates for fiscal year 2024. The updated discounted cash flow (DCF) target price of $75.00 reflects an unchanged weighted average cost of capital (WACC) of 7% and a terminal growth rate of 4%. Analysts have slightly reduced their earnings before interest, taxes, depreciation, and amortization (EBITDA) forecast by 2% to account for anticipated higher expenses.
PayPal's first-quarter results revealed several positive trends, including a healthy increase in payment volume and user engagement. The company's revenue outperformed its own guidance by 3%, driven by robust TPV growth across its branded and unbranded processing services, including a 26% YoY leap in Braintree volumes. Operating margins improved by 100 basis points YoY to 15%, thanks to a reduction in operating expenses, including a 3% YoY decrease in sales and marketing costs and an 8% YoY decrease in general and administrative expenses.
Despite these gains, analysts at Philip Securities said PayPal continues to face challenges with its gross margin, which has been contracting over recent quarters. The ongoing shift towards the lower-margin Braintree service is a contributing factor to this trend, with unbranded processing volumes now representing a larger portion of the total TPV compared to the same period last year.