It has been about a month since the last earnings report for Paypal (PYPL). Shares have added about 6.2% in that time frame, underperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Paypal due for a pullback? 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 catalysts.
PayPal's Q2 Earnings & Revenues Surpass Estimates
PayPal Holdings reported non-GAAP earnings of $1.07 per share in second-quarter 2020, which surpassed the Zacks Consensus Estimate by 25.9%. Further, the figure improved 49% on a year-over-year basisand 62.1% sequentially.
Although the bottom line was impacted by rise in credit provisions on account of revised macroeconomic projections, it benefited from unrealized gain from MercadoLibre investment.
Net revenues of $5.3 billion outpaced the Zacks Consensus Estimate of $4.9 billion. The figure improved 22% from the year-ago quarter on a reported basis and 25% on FX-neutral basis. Further, it increased 13.9% from the prior quarter.
Growing total payment volume (TPV) courtesy of increasing net new active accounts contributed to year-over-year top-line growth. Moreover, boom in digital payment and e-commerce space owing to ongoing coronavirus pandemic remained a tailwind.
Further, strong performance delivered by Venmo and merchant services contributed to the results. Additionally, PayPal Checkout experiences, which witnessed growing transactions, remained a positive.
The company expects to continue witnessing uptrend in the digital payment market for the rest of the year.
Additionally, accelerating transaction revenues of PayPal are likely to continue driving revenues. Further, its strong efforts toward product enhancements remain positives.
The deployment of QR code technology across PayPal and Venmo apps in 28 global markets is expected to deliver better payment experience. Further, activation of direct deposits for Venmo users and launch of Business Profiles are noteworthy.
Additionally, the availability of PayPal as a payment option for Mercado Pago’s online checkout is likely to enhance its e-commerce capabilities.
Top Line in Detail
By Type: Transaction revenues amounted to $4.9 billion (94% of net revenues), up 28% from the year-ago quarter.Other value-added services generated revenues of $316 million (accounting for 6% of net revenues), decreasing 26% year over year.
By Geography: Revenues from the United States totaled $2.7 billion (50% of net revenues), up 15% on a year-over-year basis. International revenues were $2.6 billion (50% of revenues), up 30% from the prior-year quarter.
Key Metrics to Consider
PayPal witnessed year-over-year growth of 21% in total active accounts with addition of 21.3 million net new active accounts during the reported quarter.Positive contributions from Honey acquisition contributed to growth in net new active number. The total number of active accounts was 346 million in the quarter under review, which surpassed the Zacks Consensus Estimate of 341 million.
Additionally, the total number of payment transactions came in at 3.7 billion, up 26% on a year-over-year basis. Further, the figure outpaced the Zacks Consensus Estimate of 3.6 billion. Strong PayPal Checkout experiences benefited the performance.
Further, the company’s payment transactions per active account were 39.2million, which improved0.5% from the year-ago quarter, reflecting strong customer engagement on PayPal’s platform. Further, the figure surpassed the Zacks Consensus Estimate of 38.9million.
TPV amounted to $221.7 billion for the reported quarter, reflecting year-over-year growth of 29% and 30%on spot rate and currency neutral basis, respectively. Further, the figure surpassed the Zacks Consensus Estimate of $209.3 billion.
Notably, year-over-year growth in TPV was primarily driven by robust Venmo, which accounted for $37 billion of TPV, surging 52% on a year-over-year basis courtesy of strong monetization efforts.
Further, merchant services, which contributed 91% to the TPV,and the volume generated from these services was up 28% year over year. The company witnessed around 1.7 million of merchants signing up during the second quarter.
PayPal’s operating expenses were $4.3 billion in the second quarter, up 19.7% from the prior-year quarter. As a percentage of net revenues, the figure contracted 170 basis points (bps) year over year.
Consequently, non-GAAP operating margin came in at 28.2%, expanding 500 bps from the year-ago quarter.
Balance Sheet & Cash Flow
As of Jun 30, 2019, cash equivalents and investments were $13.05 billion, up from $10.2billion on Mar 31, 2019.
PayPal had a long-term debt balance of $8.9 billion at the end of second quarter compared with $7.9 billion at the end of first quarter.
The company generated $2.4 billion of cash from operations, up from $1.5 billion in the previous quarter.
Free cash flow came in at $2.2 billion during the reported quarter, up from $1.3 billion in the prior quarter.
Further, the company returned $220 million to shareholders and repurchased 1.4 million shares.
For third-quarter 2020, PayPal expects revenues to reflect year-over-year improvement in the range of 23% at current spot rate and 25% at FX-neutral basis.
Non-GAAP earnings, which are anticipated to grow by 25%, are expected to carry acquisitions impact of 4 cents per share.
Additionally, TPV in the third quarter is likely to exhibit an improvement of 30%.
For 2020, PayPal expects revenues to reflect year-over-year improvement in the range of 20% at current spot rate and 22% at FX-neutral basis.
Non-GAAP earnings, which are anticipated to grow by 25%, are expected to carry acquisitions impact of 11 cents per share.
Additionally, TPV for 2020 is likely to exhibit growth of high in 20s.
How Have Estimates Been Moving Since Then?
It turns out, estimates revision have trended upward during the past month. The consensus estimate has shifted 8.75% due to these changes.
Currently, Paypal has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. Following the exact same course, 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 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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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.