It feels like a lifetime ago when PayPal (NASDAQ:PYPL) spun off from online-auction portal eBay (NASDAQ:EBAY). That happened five years ago, and today PayPal is the bigger company of the two. Folks who were prescient enough to purchase PayPal stock back then have earned outstanding returns over the years.
However, even great companies like PayPal must be tested on a regular basis. As the company’s next earnings announcement is scheduled for July 29, traders might wonder if PayPal can continue to outperform and post strong data quarter after quarter.
It’s a legitimate concern as just being good isn’t good enough. Post-earnings, analysts, investors and article writers (present company included) will scrutinize and pick apart each little data point and every phrase uttered by the CEO during the conference call.
Thus, it’s not easy to impress the financial community when they’ve set the bar so high. Will PayPal clear that bar once again?
A Closer Look at PayPal Stock
With a trailing 12-month price-to-earnings ratio of 110.78x, PayPal stock is emblematic of modern tech stock valuations. In other words, we can’t just lump PayPal in with older non-tech companies that have P/E ratios of 20x or 30x. Today’s tech firms simply don’t play by the same rules, and their share prices apparently can march upwards with hardly any letup.
Granted, PayPal stock’s ascent did take a breather when the onset of the novel coronavirus wreaked havoc on the broader market. So, whereas on Feb. 19 the price of PayPal stock was almost $124, by March 23 it had fallen to $85.26.
That’s actually not too bad compared to the share price declines seen in other industries such as airlines, restaurants and cruise ships. Besides, PayPal shares have already posted terrific multi-year gains since touching $32 in 2016.
As always, however, the upcoming earnings release will test the bulls’ mettle. Just as importantly, it will provide insight into PayPal’s fiscal health. That’s vital information for anyone considering a long-term position in PayPal stock.
What’s Expected of PayPal
For the second quarter, the analyst consensus estimate models earnings of 84 cents per share. On a year-over-year basis, that would represent a decline of 2.3%. It’s reasonable to conclude that the impact of the coronavirus was taken into consideration in these figures.
On the other hand, the analyst community projects that PayPal’s quarterly revenues will total $4.95 billion. This would indicate a 15% improvement compared to the same quarter of the prior year.
It might seem contradictory that the experts are forecasting a year-over-year increase in revenues but a decrease in earnings-per-share during the same time frame.
Bear in mind, though, that earnings-per-share can be skewed lower when the stock price is high. And as we already noted, the P/E ratio strongly indicates a lofty share price.
Goldman Sees a Golden Opportunity
It’s actually a good thing for PayPal that analysts are generally keeping their second-quarter expectations muted. That’s a setup for a positive earnings surprise.
Goldman Sachs analysts, however, are bucking the trend by suggesting that PayPal experienced “unprecedented acceleration” during the second quarter.
This stance makes perfect sense because during the coronavirus-induced lockdowns, many shoppers went online to make purchases. PayPal is an integral part of the online-payments ecosystem, so the company fit right into this shift to e-shopping.
Consequently, I can’t blame the Goldman analysts for reaffirming their “buy” rating on PayPal stock. They even went so far as to hike their price target from $170 to $205. If there’s an earnings blowout, the price PayPal shares might reach $205 sooner than many people expect.
The Bottom Line
Traders can take advantage of analysts’ overly muted expectations by owning PayPal stock and holding through the upcoming earnings release. Even if there’s an earnings miss, the company is super-solid and the share price should recover in due time.
David Moadel has provided compelling content – and crossed the occasional line – on behalf of Crush the Street, Market Realist, TalkMarkets, Finom Group, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets. As of this writing, he did not hold a position in any of the aforementioned securities.