It has been about a month since the last earnings report for Paypal (PYPL). Shares have lost about 5.5% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Paypal due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
PayPal's Q1 Earnings Beat Estimates, Revenues Up Y/Y
PayPal Holdings delivered non-GAAP earnings of 78 cents per share in the first quarter of 2019, which surpassed the Zacks Consensus Estimate by 11 cents and surged 37% on a year-over-year basis.
The company’s strategic investment in MercadoLibre acted a key catalyst throughout the quarter as evident from its contribution of 8 cents to the reported EPS figure.
Net revenues of $4.128 billion, missed the Zacks Consensus Estimate of $4.129 billion. However, the figure increased 12% from the year-ago quarter.
The year-over-year growth in top line can be attributed to rapidly increasing net new active accounts and strengthening customer engagement on the company’s platform which provided a significant boost to the total active accounts in the reported quarter. Further, robust performance of Venmo and One Touch continued to contribute well to revenues.
However, sale of the U.S. consumer credit receivables portfolio to Synchrony negatively impacted revenues. Without the impact, revenues would have exhibited growth of 19%.
Top Line in Detail
By Type: Transaction revenues came in at $3.731 billion (90.4% of net revenues), up 17% from the year-ago quarter. Other value added services generated $397 million of revenues (accounting for 9.6% of net revenues), decreasing 18.6% year over year. The decline can be attributed to the sale of its U.S. consumer credit receivables portfolio to Synchrony.
By Geography: Revenues from the United States came in at $2.187 billion (53% of net revenues), up 8.1% on a year-over-year basis. International revenues were $1.941 billion (47% of revenues), increasing 17% from the prior-year quarter.
Quarter in Detail
PayPal’s strategic partnerships and portfolio strength continued to strengthen its customer as well as merchant base throughout the reported quarter, which in turn aided its total payment volume (TPV).
During the first quarter, the company revealed a partnership with Facebook’s Instagram. Per the deal, it will process payment infrastructure on the latter’s Checkout on Instagram.
Further, PayPal invested $750 million in MercadoLibre in order to make a foray into the e-commerce space. Further, this move is strengthening the company’s international presence.
Additionally, PayPal unveiled Instant Transfer in collaboration with JPMorgan Chase. This offers real-time payments for both consumers and merchants, consequently enabling PayPal’s customers to access their money seamlessly.
Further, the company’s efforts to monetize Venmo remained positive throughout the quarter. The product’s annual revenue run rate exceeded $300 million in the first quarter.
Key Metrics to Consider
Supported by these endeavors, the company recorded year-over-year growth of 17% in total active accounts, by addition of 9.3 million net new active accounts during the reported quarter. The total number of active accounts was 277 million in the quarter, beating the Zacks Consensus Estimate of 274 million. Venmo remains a key growth driver in this metric with over 40 million active customers.
Additionally, the total number of payment transactions came in at 2.84 billion, up 28.2% on a year-over-year basis. The figure topped the Zacks Consensus Estimate of 2.82 billion.
Further, the company’s payment transactions per active user were 37.9 million, which increased 9.2% from the year-ago quarter. The figure lagged the Zacks Consensus Estimate of 38.2 million.
TPV came in at $161.5 billion in the reported quarter, exhibiting year-over-year growth of 22% and 25% on spot rate and currency neutral basis, respectively. However, the figure missed the Zacks Consensus Estimate of $162.9 billion. eBay volume, which was down 4%, remains a concern. Further, it accounted for 9.7% of TPV, contracting 300 bps from the year-ago quarter.
Nevertheless, Venmo, which accounted for $21 billion of TPV, surged 73% on a year-over-year basis driven by its strong performance. Further, growing momentum of core peer to peer (P2P) also contributed $42 billion, up 41% from the prior-year quarter. Also, merchant services volume which was up 29%, helped in offsetting the declining eBay contribution during the reported quarter.
Further, mobile payment accounted for more than $66 billion of TPV, primarily driven by robust mobile checkout services of One Touch which had 12.1 million merchants and 136 million customers at the end of first quarter.
PayPal’s operating expenses were $3.61 billion in the first quarter, climbing 14.6% from the prior-year quarter.
Non-GAAP operating income rose 12.7% year over year to $934 million. Further, non-GAAP operating margin came in at 22.6%, expanding 10 bps on a year-over-year basis.
Balance Sheet & Cash Flow
As of Mar 31, 2019, cash equivalents and investments came in at $7.8 billion, down from $9.1 billion on Dec 31, 2018.
PayPal generated $1.03 billion of cash from operations and free cash flow of $809 million during the reported quarter.
Further, the company bought back 7.7 million shares worth $750 million.
For second-quarter 2019, PayPal expects revenues between $4.3 billion and $4.34 billion, growing in the range of 11-13% at current spot rate and 12-13% on FX-neutral basis.
Non-GAAP earnings are anticipated in the range of 68-70 cents per share. The company’s investment portfolio is likely to contribute 1 cent to the EPS in second quarter.
For 2019, PayPal estimates revenues between $17.85 billion and $18.1 billion, rising in the band of 16-17% at both current spot rates and on FX-neutral basis.
Further, non-GAAP earnings are expected in the range of $2.94-$3.01 per share. This includes benefit of 8 cents from PayPal’s investment in MercadoLibre.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended downward during the past month.
Currently, Paypal has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions has been net zero. Notably, Paypal has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
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