Thursday is a big day for Paypal Holdings (NASDAQ:PYPL), and by extension, for owners of PayPal stock.
After the closing bell rings, the peer-to-peer payment player will be reporting its third-quarter numbers, either vindicating the stock’s recent sellers, or vindicating the company’s growth plans.
PYPL stock is up a respectable 5% so far this year even after a 2% dip in trading so far today, and the admittedly-volatile gain has been in step with sales and profit growth that many doubters didn’t think PayPal was capable of producing.
Afterall, PYPL is competing in a market that’s becoming increasingly crowded. Not only are outfits like Square (NYSE:SQ) and Green Dot (NYSE:GDOT) digging in, credit card companies and banks are also launching comparable payment platforms. Logic says PayPal should be struggling.
Thursday’s news release could, and should, bring the debate to an overdue head. But, the debate is about more than just the numbers. A slew of qualitative developments and new partnerships for PayPal have to be considered, even if their impact can’t be quantified just yet.
PayPal Stock Earnings Preview
For the quarter ending in September, analysts are calling for a profit of 54 cents per share on sales of $3.66 billion. Both numbers are a marked improvement on the year-ago top line of $3.24 billion and a bottom line of 46 cents per share of PayPal stock. The company suggested when it dished out its Q2 numbers in July that the recently-ended third quarter’s sales would roll in between $3.62 billion and $3.67 billion.
PayPal has topped analyst estimates in each of its past six quarters, and made forward profit progress every quarter for the past three years.
What to Watch for PYPL Earnings
Though the numbers (past and projected) will clearly be an important piece of the puzzle for investors trying to determine an appropriate price for PayPal stock, the company is a work in progress. The market is going to have to make a judgment call on a handful of developments on the table right now. Three of them stand out above the rest.
1. Venmo
Those who’ve been following the PayPal story for any length of time know its Venmo service — a free peer-to-peer money-transferring platform — has been the hot button. It’s becoming less and less ‘free.’ The company pointed out with its Q2 report that 17% of Venmo’s users had already paid the company some sort of fee for use of the platform.
And that was before PayPal has truly turned up the heat on making Venmo a profit center. As of November 6th, the use of Venmo will incur a 1% transaction fee.
It matters, because the full deployment of Venmo’s monetization potential could be huge. RW Baird analyst Colin Sebastian commented following the Q2 conference call:
“Given the myriad of of monetizable avenues for Venmo, the range of medium-term outcomes are quite wide. Our analysis suggests a base case incremental revenue contribution in 2021 of $300 million, a reasonable upside scenario of $475 million, and a “best case” scenario of more than $1 billion — with margins above those of core PayPal.”
2. Partnerships
Earlier this month, PayPal announced it would be teaming up with Walmart (NYSE:WMT) in a way that would allow the retailer’s customers to make cash deposits and withdrawals to and from their digital PayPal Wallet. It’s still not exactly a bank, but for many consumers, it’s close enough to being a bank to meet their need.
While pairing up with Walmart is a huge opportunity to gain new customers and solidify relationships with other customers, PayPal doesn’t have to stop there. These kinds of partnerships represent a chance to widen the company’s net in a big way… a much-needed way of offsetting the impact of its diminished relationship with eBay (NASDAQ:EBAY).
3. iZettle, and Other M&A
In May, PayPal announced its intent to acquire Swedish payments company iZettle to the tune of $2.2 billion. iZettle’s technology can turn a smartphone into a credit card reader, stepping onto Square’s turf. Though the integration has yet to materialize, the potential is enormous.
It’s not just the prospect of iZettle’s platform that makes PayPal stock such a compelling opportunity, however. Stifel analyst Scott Devitt plainly commented earlier this week, “strategic M&A will continue to be a key driver of PayPal’s growth, product innovation, and international expansion efforts.”
Investors will want to read between the lines on that front.
Looking Ahead for PayPal Stock
As of the most recent look, the company was modeling full-year sales of between $15.3 billion and $15.5 billion, up a bit from prior guidance. Analysts are collectively modeling $15.42 billion for 2018, up 17.8% from 2017’s total sales. For the quarter already underway, analysts expect earnings per share of PayPal stock to grow from 55 cents a year ago to 65 cents this time around. Revenue is projected to rise from $3.74 billion in the third quarter of 2017 to $4.21 billion.
Both outlooks may well change once PayPal posts its Q3 numbers after Thursday’s close, though it’s not yet clear in which direction they’ll be adjusted.
Regardless, sales and profits remain in an uptrend and are expected to rise for the foreseeable future.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.
