Paypal Holdings Inc‘s (NASDAQ:PYPL) earnings report, which comes out on Thursday after the market closes, could prove to be critical. PYPL has had to deal with intensifying competition as well as making changes to its business model, such as striking agreements with Visa Inc (NYSE:V) and Mastercard Inc (NYSE:MA). Wall Street is far from clear about how things may shake out, which is definitely a big reason for the volatility in PayPal stock.
So what are the expectations for the quarter? It looks like growth will be fairly moderate, which will certainly weigh on PYPL stock.
The Wall Street consensus for PayPal earnings is 35 cents a share, which would be 4 cents better than the same period a year ago. As for the revenues, the forecast is for $2.65 billion, which would represent a 17% increase on a year-over-year basis.
PayPal Earnings Preview: What Else Can You Expect?
Another key factor here is that the competitive environment never seems to let up: PayPal must fight against some of the world’s biggest tech operators like Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) and Apple Inc. (NASDAQ:AAPL). These companies not only have tremendous financial and engineering resources, but they can also leverage their massive user bases.
Even the traditional banking industry is gearing up its efforts to get a piece of the mobile payments opportunity. One is the Zelle app, which involves several companies, including Citigroup Inc (NYSE:C), Wells Fargo & Co (NYSE:WFC), JPMorgan Chase & Co. (NYSE:JPM) and others.
Various banks are also building their own solutions, as seen with JPM. The firm’s QuickPay not only has the benefit of a large customer base but also has the advantage of a more competitive cost structure. Consider that JPM has its own network and can also use its payments app to help increase revenues from its other financial services.
Accordingly, Canaccord analyst Michael Graham recently downgraded PayPal stock from a “Buy” to a “Hold.” He noted in his report that the company’s market share in retail ecommerce could fall from 16% in 2015 to 9% by 2021.
But the big issue the PayPal earnings call will address is likely its deals with V and MA. The details are fuzzy, but investors are certainly worried. It seems like a good bet that PYPL stock will suffer from pressures on margins because of the hefty fees.
But PayPal really doesn’t have a choice. If PYPL wants to have a robust payments platform, it needs to be seamless with V and MA. And for the long-haul, the company should benefit from larger volumes of transactions, which could mean higher discounts.
Although this sounds bad, PayPal stock should not be automatically kicked to the curb. The company has continued to show user growth, with an 11% increase in its active customer accounts to 188 million in Q2. And PYPL has shown its muscle in mergers and acquisitions.
For example, the purchase of Xoom has provided a footprint in the international remittances business. And perhaps its greatest deal was for Venmo. The app is a must-have for millions of millennials. In Q2, the transactions volume spiked by 141% to $4 billion.
Still, investors need to remain cautious before they consider investing in PayPal stock ahead of earnings. Whatever PYPL reveals about its Visa and Mastercard deals will likely indicate that margins will be under much more pressure. And that could easily be enough to rattle the PayPal stock price.
Tom Taulli runs the InvestorPlace blog IPO Playbook and also OptionExercise.com, which provides interactive tools and financial services for those who have employee stock options (pre- and post-IPO). Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
