PayPal (PYPL) stock moved higher Monday by more than 4% after Goldman Sachs’ (GS) added PYPL stock to its “Conviction Buy” list, but does that make Paypal stock a buy ahead of earnings?
Goldman Sachs analyst Heath Terry maintained his 12-month price target of $45 per share on PayPal stock and bumped PYPL to its “Conviction Buy” list just two days before PYPL reports earnings. Even after the run-up, the $45 price target implies 20% upside from the current value of PayPal stock.
Terry’s rating change is due to his belief that the company’s financials and growth prospects are intact despite PayPal stock falling more than 14% since mid-July when shares traded as high at $42.55.
Terry believes that PYPL’s growth will come from an increase in active users and wallet share, merchant adoption and through Braintree, an acquisition PYPL made in 2013 for $800 million.
One of the main reasons PayPal purchased Braintree was to acquire Venmo, a mobile payment platform which allows users to transfer money free of charge. The acquisition is expected to help PayPal increase its payment volume, which Goldman’s analysts believe will hit $50 billion by the end of this year, up from just $12 billion in 2013.
Terry also stated that while the take rate for PYPL has fallen from 3.9% in the first quarter of 2012 to 3.4% last quarter, this has been mainly due to large merchants, a different mix due to the merger with Braintree and offline growth. It is believed the take rate will continue to shrink moving forward as PYPL increases growth in overall payment volume.
Heading into Wednesdays earnings announcement, Wall Street analysts on average believes PayPal’s revenue will increase 15% year-over-year to $2.27 billion while earnings per share is expected to fall 12% to 29 cents.
So Should You Buy PayPal Stock?
The main reason for PayPal stock losing 14% since mid-July were concerns about PYPL’s ability to fight off increasing competition from the likes of Alphabet (GOOG, GOOGL), Apple (AAPL) and startups like Square.
But as Goldman’s Terry noted, PayPal is financially strong despite growth in some of its businesses slowing due to increased competition, the payments market is massive. When PayPal split from eBay (EBAY), Heath Terry initiated coverage on PayPal stock, giving PYPL a price target of $48 per share and a “buy” rating.
In that report, Terry stated PYPL accounted for a little less than a percent of a $34 trillion payments market. Furthermore, Terry pointed out that while increased competition is coming, PayPal has proven its value when numerous larger companies have failed at replicating its business model.
Then in July, Terry noted that PayPal is still primarily just used by online merchants, while it has struggled to gain traction with offline merchants, a space Apple Pay and Google Wallet are really pushing into.
While the offline world may represent a large market, it shouldn’t be such a terrible thing if others gain ground in that area, because PayPal was never established in that market anyway. Only when the competition begins taking market share in the online payment world should investors grow concerned.
Right now I have to agree with Goldman Sachs analyst Heath Terry’s “Conviction Buy” rating on PayPal stock.
At this point, there is no information that should overly concern investors, which is why I will hold my PayPal stock heading into Wednesday’s earnings report.
As of this writing, Matt Thalman was long PYPL, EBAY, AAPL and GOOG. Follow him on Twitter at @mthalman5513.
