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Earnings Results: PayPal’s Venmo strikes new partnership with Amazon; stock sinks as earnings outlook comes up short

PayPal Holdings Inc. fell short of expectations with its holiday-quarter outlook Monday while also announcing a new arrangement with Inc. through which Venmo users will be able to use the service as a checkout option on the e-commerce giant’s platform.

Despite enthusiasm for the Amazon

arrangement, PayPal shares

were off more than 10% in Tuesday morning trading after the company discussed a number of factors that could weigh on results in the holiday period, including supply-chain pressures, a rebound for in-person commerce, and eBay Inc.’s

ongoing transition to its own managed-payments system.

For the fourth quarter, PayPal expects $6.85 billion to $6.95 billion in revenue as well as $1.12 in adjusted earnings per share. Analysts were anticipating revenue of $7.24 billion and adjusted EPS of $1.28 a share.

“We’re off to a solid start in the fourth quarter, but growth rates still remain slightly below our prior expectations,” Chief Financial Officer John Rainey said on PayPal’s earnings call. “In addition, retail supply chain and labor market concerns, which may impact the important holiday season, have led us to adopt a more cautious stance for the fourth quarter,” even though the company has seen improving trends “in recent days.”

The outlook comes in the wake of a mixed third quarter. PayPal’s revenue for the period rose to $6.18 billion from $5.46 billion, while analysts had been expecting $6.23 billion. After adjusting for stock-based compensation and other expenses, PayPal earned $1.11 a share, up from $1.07 a share a year earlier. Analysts tracked by FactSet were expecting $1.07 in adjusted earnings per share.

During the third quarter, the company generated $310 billion in total payment volume, or the value of payments flowing through its system, with the metric up 26% from a year earlier. Analysts were projecting $312.5 billion in TPV. PayPal said that its TPV would have increased 31% when excluding contributions from eBay, which is in the process of migrating to its own payments system.

Venmo processed $60 billion in TPV, up 36% from a year earlier.

PayPal expressed confidence in its medium-term growth expectations, and Chief Executive Dan Schulman noted on the company’s earnings call that he expects the company’s revenue to “accelerate throughout next year” as the eBay impacts and other “temporal” challenges ease.

Still, at least one analyst could see why investors might have some quibbles with the company’s preliminary view of 2022, specifically Rainey’s commentary that while it’s difficult to forecast performance in this complex environment, PayPal would currently peg revenue growth expectations at about 18%.

Wolfe Research analyst Darrin Peller wrote that though he sees that outlook as “conservative given continued uncertainty around supply chain and mix,” the forecast did come in “below expectations and consensus of 21% growth.”

More positively in the view of analysts, PayPal announced that U.S. Venmo users will have the option to pay for Amazon purchases with the service starting early next year.

“This agreement with Amazon is the start of an exciting journey with them,” Chief Executive Dan Schulman told MarketWatch. He said that PayPal’s flexibility to strike such an arrangement comes as a result of the company’s changed relationship with eBay.

PayPal is no longer eBay’s main payments partner as it was when the companies first separated in 2015, meaning that eBay is moving volume away from PayPal but that PayPal also has the freedom to pursue relationships with other merchants.

Schulman called the agreement “a meaningful moment on Venmo’s monetization efforts.” Wedbush analyst Moshe Katri also called the move a “positive” development.

Even before the Amazon arrangement kicks in, PayPal expects to be transaction-margin positive this year and believes it is on track to hit $900 million in revenue for 2021, Schulman told MarketWatch.

PayPal’s stock has declined 26% over the past three months, as the S&P 500

has gained 6%.

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