After intense pressure from infamous activist investor Carl Icahn resulted in eBay Inc. (EBAY) agreeing to spin off its online payment division PayPal Holdings Inc. (PYPL), there were many questions as to the viability of the move for both parties.
Criticisms became even more pronounced when PayPal stock hit rock bottom in the markets at $30.63 in late September of last year, or more than 19% below its initial public offering. However, with PYPL’s latest earnings report, most of the earlier apprehensions are now firmly directed at eBay.
In the fourth quarter of fiscal year 2015, earnings for PayPal stock hit 36 cents per share, up two cents from Wall Street’s consensus estimate. The beat came largely on the back of a hearty 19% leap in top-line sales to $2.6 billion from $2.19 billion in Q4 of last year.
With these solid numbers, PYPL has exceeded EPS targets for every quarter since its IPO on July 6, 2015.
But investors are really keying in on the quality of PayPal stock’s earnings. Unlike so many other companies these days, PYPL isn’t artificially inflating its profitability margins by cutting whatever resources they can find. Quite the opposite: Both business expenses and research and development costs have been steadily increasing over the years, confirmation that management is keen on dominating the digital payments sector.
PayPal Stock Not Intimidated by Competition
PYPL will need to maximize every advantage it can acquire, as the competition reads like a who’s who of technology giants. Perhaps the most notable alternative offering is Apple Pay, a digital wallet service that works seamlessly among Apple Inc. (AAPL) products. Not to be outdone is Android Pay, a similar service provided by Alphabet Inc. (GOOGL). The wildcard comes in the form of startup companies like Stripe, which offer apps that allow businesses to immediately accept digital sales transactions.
Luckily for PYPL stockholders, the digital payment industry is a lot more difficult to crack than previously imagined. The distinct advantage that PYPL leverages is market share — it was the first to introduce the concept of e-commerce transactions to a broader audience, and it is not letting go of its lofty status. In fact, the company signed on 6.6 million new accounts in Q4, growing 65% faster than the average quarter.
That’s some serious firepower, and it will presumably only get better from here on out for PayPal stockholders. Last year, the company introduced a Buy button — an app that simplifies online payments for mobile users. It became such a hit with merchants and consumers alike that this year, industry experts are predicting that transactions using Buy will total $96.2 billion, or a 28.4% jump from the prior year’s result.
Essentially, that leaves both AAPL and GOOGL behind by a considerable margin. Even the markets have weighed in more favorably to PYPL stock, which is up 2% year-to-date, whereas GOOGL remains flat, and AAPL is down a shocking 10%. Of course, there are plenty other reasons as to why these tech giants have so far disappointed, but the underlying message is clear — a fat wallet can’t replace strong business acumen.
It’s a lesson that former owner eBay is learning the hard way. Prominent shareholders and supporters — including the aforementioned Icahn — are dumping the online bidding website and instead, making allegiances to the new kid in town. Who can blame them? The once-pioneering eBay looks old and tired, a sin among tech stocks. And fierce rival Amazon (AMZN) has been lighting up like a Christmas tree — a situation that has only been exacerbated since the PYPL split.
This is not to say that PayPal stock has a guaranteed road to success or that eBay is doomed to failure. Certainly, there are unique challenges to both companies. But as I had mentioned last December, digital payments is the future of money. This is the main reason why many are bullish on PayPal stock. Anybody can build an e-commerce website. Not everyone can build a trusted technology that has implications well beyond retail markets — nor do they have the business smarts to keep customers and clients hungry for more.
The dog days are coming to a close for PayPal stock. Unencumbered by the crippling weight of an underperforming bureaucracy, PYPL has made the most of its opportunities, edging Wall Street expectations since its IPO last year. Its most recent earnings report confirms that PYPL is in it for the long haul — an excellent confidence-boost for PYPL stockholders, but not so much for the competition.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
