(Reuters) -PayPal ( PYPL ) shares fell 5% in premarket trading on Tuesday after the digital payments giant's operating margin shrank in the fourth quarter, raising concerns over the possibility of a sluggish recovery and overshadowing a strong profit forecast for 2025.

Investors have been worried about challenges to the company's profit margins, which benefited for years from a first-mover advantage in the digital payments industry but had fallen behind following the pandemic amid slowing spending and rising competition.

Technology behemoths such as Apple and Alphabet's Google have emerged as new entrants into PayPal's ( PYPL ) core market, while traditional card networks - Visa and Mastercard ( MA ) - have also expanded their digital payments footprint in recent years.

Since taking over in late 2023, PayPal ( PYPL ) CEO Alex Chriss has focused on high-margin products and touted 'profitable growth' as the company's new strategy. PayPal ( PYPL ) has since pushed to revitalize growth in branded products, improve pricing and sharpen cost-cutting efforts.

The company has also worked to defend its dominant position with new products, including a "one-click" checkout feature called Fastlane, and forged lucrative partnerships with companies such as Global Payments ( GPN ) and Fiserv ( FI ).

While PayPal's ( PYPL ) adjusted operating margins contracted by 34 basis points to 18% in the fourth quarter, efforts toward profitable growth helped the company close the year with margins expanding 116 basis points to 18.4%.

"We set out at the beginning of 2024 to narrow our focus, improve execution, and reposition the business," Chriss said.

"The improvements we made to branded checkout, peer-to-peer, and Venmo, plus the progress we made on our price-to-value strategy, are beginning to show up in our results. "

PayPal ( PYPL ) expects full-year adjusted profit to grow between $4.95 and $5.10 per share, surpassing Wall Street views of $4.90 according to estimates compiled by LSEG.

Transaction margin dollars, a key measure of the profitability of its core business, increased 7% for the full year. It expects to grow TMD between 4% and 5% in 2025.

SPENDING RESILIENT DESPITE CHALLENGES

In a bright spot, consumer spending has remained resilient as Americans brush off concerns over high interest rates and shrinking savings, splurging on everything from travel to online shopping.

Analysts and investors are optimistic about the outlook for volume growth for the sector this year, though the recent imposition of tariffs by the U.S. President Donald Trump's administration on China are seen as potentially inflationary.

For the first quarter, PayPal ( PYPL ) expects to post an adjusted profit in the range $1.15 to $1.17 per share, above expectations of $1.14.

PayPal's ( PYPL ) net revenue increased 4% to $8.4 billion in the quarter ended Dec. 31, while total payment volume climbed 7%.

It posted a fourth-quarter adjusted profit of $1.19, topping estimates of $1.12.

PayPal's ( PYPL ) shares surged nearly 40% in 2024, outperforming broader markets and ending three years of consecutive annual declines.