Is it possible that Carl Icahn, along with a whole slew of other investors, were wrong about the growth/strength PayPal (PYPL) would exhibit if it could just get out from underneath the slow-moving shadow of former-parent eBay (EBAY)?
That was certainly the assumption touted as indisputable fact earlier in the year, when demands for a standalone PayPal stock were being made.
A solid earnings report from eBay just a few days ago was likely dismissed as a one-time stroke of luck by those who adamantly supported the seperation of the two companies … those who were certain PayPal was still the stronger division.
Now, though, a lackluster PayPal earnings report has to have at least some of the pro-spinoff crowd questioning the decision.
PayPal Earnings
In its third quarter of 2015 — its first quarter as a standalone company — online payment middleman PayPal earned an operating profit of 31 cents per share on revenue of $2.26 billion.
Whether or not that was a success or failure is largely a matter of perspective … and a matter of which numbers are used as the yardstick. Thomson Reuters estimates says analysts were collectively expecting a profit of 29 cents per share of PayPal stock, and a top line of $2.27 billion, translating into an earnings beat. Yet, last quarter’s numbers don’t compare particularly favorably to the year-ago figures of a profit of 33 cents per share and sales $2.3 billion.
Either way, despite the earnings beat, revenue fell a bit short of expectations and per-share earnings conspicuously failed grow. Did they? Overall adjusted profits were up 31% on a year-over-year basis to a total of $377 million.
The varied (and confusing) array of comparisons aren’t atypical of a company recently spun off from a parent company — nobody knows exactly what to expect, as there’s never a crystal clear picture of what was left behind at the parent, what the spinoff company took with it, and what the close relationship meant for both companies in terms of immediate sales and profits.
Now with its first quarter results setting the pace and establishing something of a baseline, owners of PayPal stock will have a better idea of what to expect going forward.
In the Meantime …
In the meantime, PYPL shareholders have a lot to think about in the wake of the Wednesday evening’s PayPal earnings report — an overall disappointment, given the 2% selloff PayPal stock suffered on Thursday. Namely, investors must be wondering if PayPal isn’t the growth powerhouse it was touted to be while under the eBay umbrella.
Analysts thus far aren’t deterred, still calling for a profit of $1.25 per share of PYPL this year, on revenue of $9.23 billion, and expecting those figures to grow to earnings of $1.49 per share of PayPal stock next year when the company is expected to drive $10.71 billion in sales.
It’s difficult to be quite that optimistic, though, when the company didn’t even come close to demonstrating such growth in the third quarter.
To that end, it was Kevin O’Leary (of Shark Tank fame) who may have best explained what may tacitly be weighing on investors’ minds about PayPal right now … profit margins are unlikely to ever get any better than they are right now. Indeed, they may shrink as competition in the payment space gets tougher.
O’Leary’s point was simply that PayPal relies — and only relies — on taking out a small piece of a cash transfer or payment to drive revenue.
It’s only a matter of time, though, before a competitor in the financial services space is willing to perform payment services for free just to attract a customer which that company will then monetize another way. PayPal has no other way to monetize its customer base than the one it employs right now.
Indeed, the fact that the biggest chunk of PayPal’s payment-processing growth came from its debit-account-to-debit-account middleman Venmo should concern owners of PayPal stock for one simple reason — it doesn’t actually drive any revenue for PayPal. PayPal says that fact may change soon, but Venmo’s pricing won’t be any different than PayPal pricing, which once again leaves it vulnerable to equal or better competition … a tricky Catch-22.
Bottom Line for PayPal Stock
It’s not an insurmountable hurdle for PayPal. But, until (or unless) PayPal proves it can successfully drive revenue with Venmo and simultaneously proves it can organically grow again, that forward-looking P/E of 24 doesn’t leave room for such doubt.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
