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PayPal (PYPL -5%) is rejected today following its slight Q3 revenue miss and Q4 revenue growth guidance below consensus. The payment processing firm did deliver Q3 earnings above consensus, sustained decent total payment volume (TPV) growth, and enjoyed a modest bump in active accounts yr/yr and sequentially. However, even though PYPL remains in a transition year, keeping the pace of recovery volatile from one quarter to the next, the stock was trading at a 52-week high heading into Q3 numbers, elevating expectations. As a result, the revenue-related weak points overshadowed the quarter's highlights, triggering today's mild profit-taking.

• Stacked against the previous quarter, PYPL's growth in Q3 represented a minor deceleration. Revenue grew 6% yr/yr to $7.85 bln, supported by TPV growth of 9% and payment transactions growth of 6%. However, it is important to note that PYPL was lapping more challenging comparisons in Q3 than Q2.
• Adjusted EPS swelled by 22% yr/yr relative to the company's guidance to $1.20, assisted by several factors, including ongoing optimization of transaction loss, Venmo, and improvements in credit. Transaction margin dollars, which measure payment processing profitability, accelerated slightly sequentially, increasing by 8% yr/yr in Q3. Braintree, an online payment systems platform focused on smaller businesses, contributed materially to transaction margin dollars.
• The steady numbers showcase the underlying stability of PYPL's operations despite engaging in a significant transformation to shift from a payments company to a commerce platform to unlock the full potential of PayPal and Venmo. Speaking of which, PYPL has been taking a fresh look at Venmo, finding ways to upgrade the user experience. Thus far, PYPL has seen mild progress, boasting a 30% uptick in monthly active debit card accounts. However, only 5% of active Venmo accounts are monthly, displaying plenty of runway left.
  • Other transformation initiatives are progressing steadily. For instance, global branded checkout volumes inched 6% higher FXN, consistent with the mid-single-digit growth PYPL has observed for the past three years. Meanwhile, PayPal Complete Payments Platform, or PCP, which caters to small and medium-sized businesses (SMBs), launched in China and Hong Kong last month, with more markets slated for 2025. Where PCP is live, PYPL has steadily converted volume from its legacy products, with 40% of SMB volume now on the platform.
• While these developments are promising, PYPL's Q4 guidance left something to be desired, projecting a low to mid-single-digit increase in adjusted EPS yr/yr and a low single-digit improvement in revenue. The projections are not much of a divergence from the company's previous outlook for the year, reflecting an assumption of consistent macroeconomic and consumer spending conditions. However, Braintree is eating into expected revenue as PYPL focuses on margins over volumes, which the company anticipates will persist through 2025.

Bottom line, PYPL's Q3 performance was decent, with several highlights surrounding its ongoing transformation. However, Q3 and expected revenue to close out 2024 is disappointing, producing a sell-the-news reaction as investors lock in profits following one-year highs yesterday.