PayPal adjusted margin forecast cut eclipses higher profit expectations

PayPal Holdings Inc on Monday cut its outlook for annual adjusted operating margin, overshadowing its profit forecast raise, sending shares in the payments firm down 5% in extending trading.PayPal expects adjusted operating margin expansion of 100 basis points this year, compared with its earlier forecast of a 125-basis-point growth.

Investors are assuming that the company’s branded checkout button, a high margin business, isn’t doing as well as people thought it was and the fear is that it is losing market share to Apple, Dan Dolev, analyst at Mizuho told Reuters, explaining the drop in PayPal shares.

The high interest-rate environment has also begun to discourage expensive purchases as shoppers increasingly find themselves under heavy debt, particularly lower-income bracket customers, analysts have said. PayPal payments volume on a forex-neutral basis came in at $354.5 billion in the first-quarter ended March 31, compared with $357.4 billion in the fourth-quarter.

Even as the company cut operating margin outlook, it raised its full-year adjusted profit forecast on the back of stronger-than-expected e-commerce trends and cost cuts.

PayPal now expects adjusted profit growth of about 20% to $4.95 per share, above analysts’ estimate of $4.88 per share. The company also highlighted its push towards artificial intelligence in a call with analysts, as it expects new advances in generative AI to help accelerate its productivity initiatives.

“We expect AI will enable us to meaningfully lower our costs for years to come,” CEO Dan Schulman said, adding that the company intends to use the technology to add features for both merchants and consumers on its platform.

PayPal has said in the past that it is focused on lowering expenses while cautioning that inflation was impacting discretionary consumer spending.

PayPal revenue rose 10% on a forex-neutral basis to $7.04 billion in the first-quarter.

It posted a profit of $1.17 per share on an adjusted basis, compared with 88 cents last year.

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