The Ratings Game: PayPal is ‘back into the fast lane’ after earnings address eBay, partnership fears

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PayPal Holdings Inc. soothed some key investor fears with its latest earnings commentary, helping to send shares higher in Thursday trading.

Heading into the company’s Wednesday afternoon report, there was concern over PayPal’s PYPL, +7.50%  disclosure from three months back that partner implementation delays were impacting revenue. In addition, the company was edging closer to next year’s eBay Inc. EBAY, -7.87%  contract expiration, at which point the digital payments giant will be relegated to a more minor role on eBay’s platform. The stock had lost 20% in between PayPal’s June-quarter report and the September-quarter one it delivered on Wednesday.

Analysts liked what they heard from the company this time around, however, as management projected that the delayed pricing and partner implementations that PayPal highlighted on its prior call were on track for full integration by the end of 2019. At the same time, the company provided new clarity on its expectations for the eBay revenue roll-off while emphasizing that the site represents a shrinking portion of PayPal’s overall volume, at 8% as of the third quarter.

See more: PayPal stock surges after earnings beat across the board

The stock is up nearly 8% in Thursday morning trading.

“Management noted that it expects the eBay revenue contribution to be 6% by the contract termination next year, and that it would see a step down of remaining volume over time – with a 50% expected long-term retention,” Jefferies analyst John Hecht wrote. “In all, the company sees a 1% headwind to revenue from this next year. These details were largely consistent with our expectations, and we believe they will be considered constructively as they appear both manageable and as the clarity increases financial visibility.”

He rates the stock a buy with a $140 target price.

Raymond James analyst John Davis wrote that while the headwinds from eBay “will certainly increase in 2021,” PayPal is gaining more time to find other revenue sources that can dilute eBay’s impact further. He also called the company’s initial forecast for 2020 “better than feared” due to a more minimal initial eBay impact than some had been predicting. The company is calling for 17% revenue growth next year after adjusting for currency impacts.

Caso rates the stock at outperform with a $122 target.

PayPal won praise for its current financial performance as well, with Susquehanna analyst Jamie Friedman highlighting that the company sported its best operating margin expansion since splitting from eBay in 2015.

Wrote Friedman: “How did they do it? Non-transaction related expenses grew just 1.9%, or just 4 cents for every dollar increase in revenue… profiling the low marginal costs and scaleability of the business. At the same time, transaction losses declined 4 basis points year over year to just 14 basis points, reflecting better risk management.”

He has a positive rating and $120 price target on the stock.

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Ramsey El-Assal of Barclays said that PayPal was “moving back into the fast lane” as it posted an acceleration in payment volume growth while also showing greater engagement and user numbers. He rates the stock at overweight with a $127 price target.

For Bernstein’s Harshita Rawat, however, the results didn’t merit a jump to the bull camp. She argued that hedging gains and credit outperformance were partly responsible for PayPal’s revenue beat while pricing and partnerships might not deliver the level of upside that others were hoping.

She also keyed in on the company’s disclosure that Venmo is now on track for a nearly $400 million annual revenue run rate.

“While it is encouraging to see PayPal disclose metrics on Venmo again and multiple levers for monetization (e.g.,. the new Venmo credit card), we believe that pace of Venmo monetization remains below investor expectations—and also believe that ‘Pay with Venmo’ (the biggest long-term opportunity) has been slower than expected,” she wrote. “The $400 million annual run-rate revenue is in-line with investor expectations.”

Rawat has a market-perform rating and a $110 price target on PayPal’s shares.

Read: Microsoft’s stock surges as big earnings beat prompts analysts to boost price targets

Of the 43 analysts tracked by FactSet who cover PayPal’s stock, 33 have buy ratings and 10 have hold ratings. The average price target listed is $125.82, about 20% above recent levels.

PayPal’s stock has risen 24% so far this year, as the S&P 500 SPX, +0.11%  has gained 20%.

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