Up more than 40% for the year headed into Wednesday afternoon’s earnings report, there’s no denying investors are, or at least were, bullish on Paypal Holdings Inc (NASDAQ:PYPL). Although competition in the payments space continues to heat up, a string of new deals has maintained PYPL stock as the go-to investment in this space.
On the flipside, up near 50% since the end of December, it’s also tough not to see PYPL stock as vulnerable to a wave of profit-taking.
In fact, SunTrust Robinson Humphrey, recently downgraded PayPal for no other reason that its rich valuation (trading at a trailing price-earnings ratio of 50, and a forward-looking P/E of 27.5).
As it turns out, the bulls were right to be optimistic. Wednesday’s post-close report indicated 18% revenue growth and 27% earnings growth. But most importantly, PYPL stock continued to tack on gains in after-hours action.
PayPal Earnings Recap
For the quarter ending in June, PayPal earned an operating profit of 46 cents per share, driving sales of $3.14 billion. Analysts had collectively modeled a profit of 43 cents per share and revenue of $3.09 billion. The company turned a profit of 36 cents per share of PYPL stock on sales of $2.65 billion in the comparable quarter a year earlier.
Its revenue base is not just growing, either — its accelerating. PayPal added 6.5 million new accounts last quarter, upping the prior addition rate by 80%. Total transactions were up 23%, to 1.8 billion. Free cash flow grew from $495 million in the same quarter a year earlier to $747 million last quarter.
CEO Daniel Schulman commented on the report:
“Our strong results reflect PayPal’s transformation from a single product to a platform company, from a vendor to a strategic partner to both merchants and ecosystem players, and from a checkout option to an increasingly more central way for consumers to manage and move their money.”
The Stage Is Set for Growth
Not that PayPal isn’t usually in growth mode, but 2017 to-date has been an especially fruitful year in terms of setting up new partnerships. Samsung Electronics Co Ltd (OTCMKTS:SSNLF) has added PayPal as an option within its Samsung Pay app.
JPMorgan Chase & Co. (NYSE:JPM) and PayPal have also reached an agreement that allows Chase cardholders to link their cards to their PayPal accounts.
Visa Inc (NYSE:V) and PayPal, after struggling to get along for some time now, have figured out terms both sides of the table can live with in the European market.
Its crowning achievement, however, is arguably a long-awaited relationship with Apple Inc. (NASDAQ:AAPL). In short, apps and music available at Apple’s app store and iTunes venue can now be purchased using PayPal.
Yet, none of those new deals drove revenue growth in the previous quarter. The aforementioned fiscal progress was mostly organic growth even though its nascent Venmo venture has yet to be fully monetized.
Likewise, PayPal didn’t close its acquisition of Tio until mid-July, making it more of a business-oriented bill-payment middleman as opposed to being a consumer-oriented one.
All these new partnerships and deals will drive even more growth in future quarters, beginning with the current one.
Looking Ahead for PYPL Stock
To that end, for the quarter currently underway the pros expect the company to turn $3.13 billion in revenue into a profit of 42 cents per share. Both compare favorably to the year-ago top line of $2.67 billion and earnings of 35 cents per share of PYPL stock. But, neither number may yet fully reflect the potential of the new deals the company has recently struck.
In fact, PayPal offered its own guidance as part of its second quarter report, saying it expects revenue to grow between 18% and 20% in the third quarter, with or without the impact of currency exchange.
Operating earnings are projected to roll in between 42 cents and 44 cents per share of PYPL stock for Q3, slightly exceeding estimates. On a full-year basis, the organization is looking for a per-share profit of between $1.80 and $1.84, again topping last year’s tally.
While long-term growth may be in the cards, that won’t be enough to stave off a short-term, technically driven pullback from overbought PYPL stock — SunTrust analyst Andrew Jeffrey was right in that regard.
Still, any decent-sized dip represents a buying opportunity for the name that still dominates the category despite attempts by others to meaningfully penetrate the market. PayPal has been able to beat them or buy them, and that’s not apt to change anytime soon.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
