A month has gone by since the last earnings report for Paypal (PYPL). Shares have lost about 2.3% 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 the most recent earnings report in order to get a better handle on the important drivers.
PayPal's Q3 Earnings Beat Estimates, Revenues Up Y/Y
PayPal Holdings delivered non-GAAP earnings of 61 cents per share in the third quarter of 2019, which surpassed the Zacks Consensus Estimate by 9 cents and rose 5.2% on a year-over-year basis.
However, the figure was down 29.1% sequentially. We note that the company bore the brunt of unrealized losses on strategic investments in MercadoLibre and Uber Technologies during the reported quarter which resulted in a negative impact of 15 cents per share against the contribution of 14 cents from the same investment portfolio in the previous quarter.
Moreover, the year-over-year growth in the bottom line was hurt by this loss, excluding which EPS would have grown 31% to 76 cents.
Net revenues of $4.378 billion increased 19% from the year-ago quarter and 1.7% sequentially. Further, the figure was ahead of the Zacks Consensus Estimate of $4.341 billion.
Solid performance of Venmo and One Touch drove the top line. Further, rapidly increasing net new active accounts and strengthening customer engagement on the company’s platform that provided a significant boost to total active accounts and bolstered payment transactions also contributed by driving growth in total payment volume (TPV).
We believe the company’s continuous efforts toward strengthening services portfolio have yielded favorable results. Further, its two-sided platform enables it to develop and maintain direct financial relationship with customers and merchants.
Top Line in Detail
By Type: Transaction revenues came in at $3.955 billion (90% of net revenues), up 18.3% from the year-ago quarter. Other value-added services generated $423 million of revenues (accounting for 10% of net revenues), increasing 24.4% year over year.
By Geography: Revenues from the United States came in at $2.327 billion (53% of net revenues), up 19% on a year-over-year basis. International revenues were $2.051 billion (47% of revenues), increasing 20% from the prior-year quarter.
Key Metrics to Consider
PayPal witnessed year-over-year growth of 16% in total active accounts with the addition of 9.8 million net new active accounts during the reported quarter. The total number of active accounts was 295 million in the quarter, in line with the Zacks Consensus Estimate.
Additionally, the total number of payment transactions came in at 3.09 billion, up 25.5% on a year-over-year basis. However, the figure missed the Zacks Consensus Estimate of 3.129 billion. Nevertheless, the company crossed 1 billion transactions per month for the first time, which marks a big achievement.
Further, the company’s payment transactions per active account were 39.8 million, which increased 9% from the year-ago quarter, reflecting strong customer engagement on PayPal’s platform. However, the figure lagged the Zacks Consensus Estimate of 40.03 million.
TPV came in at $178.67 billion for the reported quarter, exhibiting year-over-year growth of 25% and 27% on spot rate and currency neutral basis, respectively. Further, the figure comfortably outpaced the Zacks Consensus Estimate of $177.67 billion. Growth in TPV was driven by robust Venmo, which accounted for above $27 billion of TPV, soaring 64% on a year-over-year basis driven by its strong monetization efforts.
Further, accelerating mobile volumes contributed significantly to TPV growth. This can be attributed to robust mobile checkout services of One Touch, which had 13.8 million merchants and 172 million customers at the end of the third quarter.
Further, growing momentum of core peer to peer (P2P) contributed $51 billion, up 39% from the prior-year quarter. Moreover, merchant services volume was up 31% year over year.
However, eBay volume, which was down 3%, is a concern. Further, it accounted for 8% of TPV, contracting 300 bps from the year-ago quarter.
PayPal’s operating expenses were $3.7 billion in the third quarter, up 15.3% from the prior-year quarter.
Non-GAAP operating income rose 30.4% year over year to $1.03 billion. Further, non-GAAP operating margin came in at 23.4%, expanding 200 bps on a year-over-year basis.
Balance Sheet & Cash Flow
As of Sep 30, 2019, cash equivalents and investments came in at $10.5 billion, up from $8.4 billion on Jun 30, 2019.
PayPal generated $1.1 billion of cash from operations, down from $1.2 billion in the previous quarter.
Free cash flow came in at $923 million during the reported quarter.
For fourth-quarter 2019, PayPal expects revenues between $4.89 billion and $4.95 billion, suggesting improvement in the range of 16-17% at current spot rate and 17-18% at FX-neutral basis.
Non-GAAP earnings are anticipated in the range of 81-83 cents per share.
For 2019, PayPal revised its revenue outlook from $17.60-$17.80 billion to $17.70-$17.76 billion. Further, the year-over-year growth rate is pegged at 15% at both current spot rates and on FX-neutral basis. The guidance assumes gains from 2018 acquisitions. However, the sale of U.S. consumer credit receivables portfolio to Synchrony has been a deterrent.
Further, the company revised non-GAAP earnings per share outlook downward from $3.12-$3.17 to $3.06-3.08. This includes benefit of 11 cents from PayPal’s strategic investments in the first, second and third quarter of this year.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended upward during the past month.
At this time, Paypal has an average Growth Score of C, however its Momentum Score is doing a lot better with an A. However, 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 trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Paypal has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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