PayPal (NASDAQ:PYPL) delivered its fourth-quarter earnings last Wednesday afternoon. While the company topped both its own expectations and analysts’ average estimates, its weak guidance spooked the market.
The following day, PayPal stock opened down 3.4%. It recovered on Thursday, only to slip another 2.8% on Friday. However, it rebounded 2.3% yesterday.
PYPL is up 7.7% so far in 2020. But after the roller-coaster reaction to the company’s Q4 earnings, is that trend likely to continue? Or is the stock due for another correction, like the one that lowered its value by 15% last summer and fall?
PayPal’s Q4 revenue jumped 17% year-over-year to $4.96 billion. Its top line beat both analysts’ average outlook and the upper end of the company’s own revenue guidance range. Its profit margins rose, and PYPL reported EPS, excluding some items, of 86 cents, versus analysts’ mean outlook of 83 cents. PayPal added 37.3 million net new active accounts in the quarter, bringing its total to 305 million.
Despite competition from the likes of Apple’s (NASDAQ:AAPL) Apple Pay, Square’s (NYSE:SQ) Square Cash and Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) Google Wallet, PayPal’s mobile payment app , Venmo, performed particularly well. Venmo processed $29 billion of payments, up an impressive 56% compared to the same period a year earlier.
But PayPal expects its Q1 revenue to rise by only 16%-17%, and it provided EPS guidance, excluding some items, of only 76 cents to 78 cents. Its revenue growth isn’t much of an issue, but its EPS guidance is much lower than expected. However, there’s a good reason for that.
Acquisitions Will Lower PYPL’s Q1 Earnings, But Their Potential Is Huge
PayPal made two strategic acquisitions as 2019 wound down. In September, it bought a 70% equity stake in Chinese payment processor GoPay. That was followed up in November by its $4 billion acquisition of Honey, a deal-finding browser add-on and app. PayPal’s purchase of Honey was its largest acquisition ever and is expected to close in Q1.
GoPay gives PayPal a foothold in the Chinese market. While there have been ongoing trade tensions between the U.S. and China over the past few years, their relationship is showing signs of normalizing. With a population of over 1.4 billion and a growing middle class, China represents a massive opportunity. Meanwhile, Honey is already profitable, its money-saving tools are popular with online shoppers, and it boasts 17 million active monthly users. PayPal is planning to add Honey’s technology to its own services, giving it an edge over competitors like Apple Pay.
PayPal has factored in the costs associated with these acquisitions in its Q1 guidance. That’s why its outlook is significantly weaker than analysts had expected.
The Bottom Line on PayPal Stock
PayPal’s weak Q1 guidance clearly rang some alarm bells, but the guidance is a short-term issue. The company’s revenue and user base are rapidly growing. Its Venmo mobile payment service continues to become more popular.
The acquisition of Honey makes PayPal a player in an entirely new line of business, and it may enable the company to add compelling new features to its existing products. Its stake in GoPay will allow it to enter the Chinese market. The company’s full-year 2020 guidance looks solid, and it expects its revenue growth to accelerate this year versus 2019.
The analysts polled by The Wall Street Journal are bullish on PayPal stock. Their average rating on it is “buy,” and they have a mean 12-month price target on the shares of $131.68, about 13% above the current price.
It could perform even better than that. InvestorPlace columnist Luke Lango identified four reasons why PayPal stock could zoom to $150 in 2020. The shares are likely to be little rocky after the company reports its Q1 earnings which will be impacted by the acquisitions. But after that, 2020 should be a good year for the owners of PayPal stock.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.