By Emily Bary
When PayPal Holdings Inc. reports earnings next Wednesday, it will reap the rewards of some recent bets on payments players. The company has already told investors to brace for a much larger earnings impact than previously expected thanks to its strategic investments, which includes a bet on MercadoLibre Inc., a Latin American e-commerce player.
The company will also give updates on more business-focused investments, such as efforts to expand into offline commerce and boost revenue from the popular Venmo service.
What to expect
Earnings : Analysts surveyed by FactSet expect that PayPal /zigman2/quotes/208054269/composite PYPL -2.33% earned an adjusted 69 cents a share during the second quarter, up from 58 cents a year earlier. According to Estimize, which crowdsources projections from hedge funds, academics and others, the average projection calls for 77 cents in EPS.
Consensus projections may not take into account PayPal’s disclosures from earlier in the month regarding the impact of its investments on earnings. The company said it expected a 14-cent EPS impact from the investments, whereas it had told investors in April that it projected a benefit of just 1 cent for the second quarter. Back then, the company issued an adjusted earnings outlook of 68 cents to 70 cents a share.
PayPal agreed to make a $750 million strategic investment in MercadoLibre /zigman2/quotes/200678442/composite MELI -2.36% back in March, and shares of the Brazilian company gained more than 20% during the second quarter.
Revenue : The FactSet consensus calls for $4.3 billion in June-quarter revenue, while the Estimize consensus models $4.4 billion. A year prior, the company posted $3.9 billion in revenue.
Analysts surveyed by FactSet see PayPal recording $171.8 billion in total payment volume (TPV).
Stock movement : PayPal shares have gained following six of its past 10 earnings reports. The stock has risen 43% so far this year, as the S&P 500 /zigman2/quotes/210599714/realtime SPX -0.39% has climbed 19%. Of the 40 analysts tracked by FactSet who cover PayPal, 30 have buy ratings, nine have hold ratings, and one has a sell rating. The average price target is $123.89, about 3% above current levels.
What else to watch for
Bernstein’s Harshita Rawat expects that PayPal will beat earnings expectations, though she anticipates “one of the messiest” quarters in the company’s recent history due to “many moving pieces around volume growth, Venmo monetization, pricing actions, credit divestiture impact, FX, gains on investments, recent M&A & eBay.” Rawat, who rates the stock at market perform with a $110 price target, expects 84 cents in adjusted EPS after accounting for the investment disclosures.
Macroeconomic indicators suggest to Barclays analyst Ramsey El-Assal that PayPal looks poised for another strong report. “The broader digital spending backdrop remains healthy, and we expect another solid quarter of volume growth, user adds and financial performance from PayPal,” he wrote in a recent note to clients.
El-Assal, who rates PayPal at overweight with a $135 target, is intrigued by the company’s Pay with Points initiative that allows users to make transactions using third-party rewards points.
“After launching in 4Q18, we believe PayPal’s program allowing users to make purchases by spending third-party rewards points (Amex Membership Rewards, Citi Thank You Points, Chase Ultimate Rewards, etc.) should continue to gain traction over the next couple of years, and is an underappreciated driver of out-year P&L upside,” he wrote. El-Assal sees the program driving mid-single-digit upside to earnings per share in 2021. Management may comment Wednesday on early traction for this effort.
He raised his second-quarter EPS estimate to 81 cents to account for the company’s disclosures about investment benefits.
PayPal has been trying to enhance its omnichannel offerings, purchasing hand-held point-of-sale company iZettle last year, and the company may speak to progress gaining offline acceptance. Morgan Stanley’s James Faucette points to “unexploited opportunity for PayPal to grow in the offline market, given the consumer confidence and large account base it has online.”
He rates the stock at overweight with a $129 target.
The company’s conference call will likely be missing a familiar voice, as Chief Operating Officer Bill Ready recently announced that he would step down from his role on July 15 but remain at the company to ease the transition through the end of the year. Ready came to PayPal through its acquisition of Braintree, which brought Venmo to the PayPal family as well.
“PayPal will have big shoes to fill with the loss of COO Bill Ready and we will see how management distributes his responsibilities,” wrote Deutsche Bank’s Bryan Keane, who has a buy rating and $127 price target on the shares.
As for the latest quarter, Keane thinks the company could show improvement in transaction revenue growth. “While we expect the eBay headwind to sustain, we believe it will be offset by robust [peer-to-peer]/ mobile TPV and Braintree growth as well as a potential rebound in [cross-border transaction] volumes as the USD strengthening abates,” he said.
PayPal is also expected to share more about its efforts to make money off the Venmo peer-to-peer product, which include a debit card and checkout button.