Understandably, this earnings season hasn’t exactly brought out much enthusiasm. With the economy contracting nearly 5% in the first quarter and with economists expecting more pain down the road, this has been a rather trying time. However, digital payments specialist PayPal (NASDAQ:PYPL) may help brighten the mood with its first-quarter 2020 earnings report. If anything, the dramatic lift in PYPL stock adds confidence toward the bullish argument.
Let’s dive into the essentials first. PayPal is scheduled to release its Q1 report on May 6, with analysts expecting earnings per share to hit 76 cents. Individually, estimates range from 69 cents to 83 cents. In the year-ago quarter, PayPal delivered EPS of 78 cents, a dime above the consensus target.
On the revenue front, analysts are looking for $4.8 billion. The estimate spectrum runs between $4.5 billion to $4.9 billion. In Q1 2019, PayPal rang up $4.1 billion. Obviously, if the company can produce a solid number here, PYPL stock would likely soar.
Much of the trajectory will depend on how we and the international community responds to the novel coronavirus. But in my opinion, PYPL stock has upside potential, no matter which way this health crisis turns.
If the Coronavirus Remains an Uninvited Guest, PYPL Stock Could Still Rise
Despite some promising developments in the race for a treatment, we still don’t know much about the coronavirus. Recently, The Hill reported that White House health adviser Dr. Anthony Fauci believes it’s almost certain that the virus will return in the fall. Therefore, if we’re not prepared, we could suffer another catastrophe.
On the surface, that’s not great news for PYPL stock, nor for commerce in general. However, one positive is that society has been forced to adapt to a gig worker mentality. With most states imposing stay-at-home orders during Covid-19’s most pernicious phase, non-essential workers suddenly became telecommuters.
Already, gig workers were used to digital payment alternatives like PayPal to invoice their services to their clients. Today, most Americans at least have had a taste of such platforms. Naturally, the intuitive nature of PayPal offers an organic (and free) marketing opportunity at a critical time. It’s reasonable to assume that the company will have converted some of these individuals who found themselves at home.
Additionally, PayPal has viable offerings beyond the gig workers’ space. As you know, the company owns the mobile payment app Venmo. And what’s brilliant about Venmo – particularly in this social distancing era – is that it doesn’t require physical contact. Well, that’s not entirely true – you do have to touch your phone. But you don’t have to touch anyone else’s or anything, which makes it superior to physical payment processors offered by Square (NYSE:SQ) or similar institutions.
That’s a huge plus for PYPL stock. Of course, the drawback is mass-scale adoption. However, at a time like this, that integration could come much quicker than previously anticipated.
Without Covid-19, Even Better
On Wednesday, Dr. Fauci expressed confidence in the drug remdesivir to treat Covid-19. Developed by Gilead Sciences (NASDAQ:GILD), remdesivir received new life when President Donald Trump frequently touted it as a potential cure. Now, some evidence supports that claim.
However, investors should be clear that despite Dr. Fauci’s support, other tests have less-than-ideal results. One study in particular failed to test the drug against a placebo, rendering it in my opinion inconclusive.
Still, let’s just assume that the scientific community comes out with an effective treatment at scale. In that case, PYPL stock comes out a big winner.
Again, the underlying company already resonated with gig workers. Whether the coronavirus came or not, this trend was not about to go anywhere but up. Logically, a return to the old normal combined with pent-up economic demand would do wonders for this broader market.
Then you have the push for cashless societies. Again, irrespective of a pandemic, this is one of the top trends that promises radical transformation. But to get there, more of the world needs to find banking solutions. To that effect, PayPal’s myriad services offer substantial opportunities for the world’s unbanked and underbanked to be connected.
Confident but Smart
So, does that mean investors should jump on PYPL stock ahead of earnings? From my perspective, PayPal offers the best chance for a meaningfully robust earnings beat this season. At the same time, we must recognize the ugliness in the economy.
When you potentially have 30 million Americans that are currently unemployed, that doesn’t do any business sector any good. Therefore, a modest beat on key metrics could just as well see PYPL stock plummeting. I don’t think this will happen but the possibility exists.
Ultimately, I would approach PayPal as I would any other investment in this environment: with caution. However, I’m simultaneously confident. Thus, take a small position here if you want but do keep the powder keg dry for any possible discounts.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.
