Why PayPal Stock Could Have a Strong Earnings Season

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Digital payments platform PayPal (NASDAQ:PYPL) is set to report second quarter numbers on Wednesday, July 24. There’s reason to believe that those numbers will be very good and that PYPL stock will rally after the print.

Why PYPL Stock Could Have A Strong Earnings Season
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For starter’s, PayPal has a knack for beating earnings estimates. On top of that, analysts have been upgrading the stock ahead of this report, while Q2 EPS estimates have been trending higher over the past several weeks. eBay (NASDAQ:EBAY) also just reported strong Q2 numbers, confirming that global e-retail trends remain favorable. E-commerce sales data out of the U.S., U.K., E.U. and Canada over the past several months has been similarly favorable. Further, PayPal told investors a few weeks ago that its investment in Latin American e-commerce giant MercadoLibre (NASDAQ:MELI) would result in a big earnings boost this quarter.

Broadly, then, it is clear that PayPal is on the verge of reporting blowout Q2 numbers. The big question: Will PYPL stock rally in response?

Probably. The valuation on PayPal stock is stretched here and now. But, this is warranted by strong fundamentals and low rates. So long as rates remain low and PayPal’s numbers remain good, PYPL stock should grind higher.

As such, PYPL stock does look positioned for a nice beat-and-rally this earnings season.

Signs of Strong PayPal Earnings Report

Multiple data points suggest that PayPal is set to report very strong Q2 earnings on Wednesday. Those data points include:

  • PayPal earnings always tops Street estimates. Over the past three years (12 quarters), PayPal has never missed quarterly Street EPS estimates, and has only missed revenue estimates once. That revenue miss was by a fraction of a percent.
  • Analysts have been upgrading PYPL stock ahead of Q2 earnings. Over the past month, a flurry of Wall Street analysts have upgraded PYPL stock, as Wall Street is increasingly optimistic that Q2 earnings will be very good and provide a nice upside lift for the stock.
  • EPS estimates for this quarter have been trending higher. Three months ago, EPS estimates for this quarter were around 69 cents. A week ago, they were at 71 cents. Today, the EPS estimate sits at 74 cents. This trend up further implies that analysts think this quarter could be really good.
  • eBay reported strong Q2 numbers. eBay just reported strong Q2 numbers that included above-consensus revenue, volume, and engagement growth, and a boosted full-year profit outlook. These numbers broadly confirm that global e-retail trends remain vigorous.
  • U.S. e-retail sales growth accelerated in Q2. This indicator accelerated in Q2 to 11.9%, from 11.2% in the first quarter.
  • EU and Canada e-retail sales growth trends were healthy in Q2. EU e-retail sales growth accelerated from 8.8% in January 2019, to 10.9% in May 2019. Canada e-retail sales growth accelerated from 17.5% at the beginning of 2019, to 21.8% in May.
  • Earnings will get a huge boost from MercadoLibre. PayPal announced in early July that its Q2 earnings will get a $0.14 per share boost from the company’s investment in MercadoLibre. (MercadoLibre’s stock price has more than doubled this year.)

PayPal Stock Could Rally in Response

To be sure, PayPal stock has rallied in a big way ahead of what is widely expected to be a blowout Q2 earnings report. Specifically, PYPL stock is up more than 40% year-to-date, trades at all-time highs, and sports a multi-year high valuation at 40-times forward earnings. This perhaps overly bullish backdrop should give investors pause.

But, it won’t stop PYPL stock from rallying after Q2 earnings.

The premium valuation and recent rally in PYPL stock are justified by two things. On one end, PayPal is supported by increasingly favorable fundamentals. Consumers globally continue to pivot with increasing momentum to the digital channel, and as they do, they are increasingly adopting digital payment methods like PayPal. So long as the global consumer and e-retail backdrops remain favorable, PayPal stock should continue to move higher.

On the other end, interest rates in the U.S. have plunged in 2019, and this low rate backdrop supports a relatively extended valuation in PYPL stock.

As such, so long as the numbers remain good and rates remain low, PYPL stock should charge higher.

Bottom Line on PYPL Stock

PayPal’s second quarter earnings report should be very good, and while the valuation on PYPL stock is relatively extended ahead of that report, the stock should still be able to rally in response because the fundamentals warrant such a rally.

As of this writing, Luke Lango was long PYPL and EBAY. 


Article printed from InvestorPlace Media, https://investorplace.com/2019/07/paypal-stock-strong-earnings-season/.

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