Paypal (PYPL) Up 5.7% Since Last Earnings Report: Can It Continue?

It has been about a month since the last earnings report for Paypal (PYPL). Shares have added about 5.7% 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 its most recent earnings report in order to get a better handle on the important catalysts.

PayPal's Q1 Earnings & Revenues Lag Estimates

PayPal Holdings reported non-GAAP earnings of 66 cents per share in first-quarter 2020, which missed the Zacks Consensus Estimate by 12%. The figure remained flat on a year-over-year basis but declined 23.3% sequentially.

Increasing credit loss reserves owing to revised macroeconomic projections on account of coronavirus pandemic impacted the bottom line by $17 per share.

Net revenues of $4.62 billion lagged the Zacks Consensus Estimate of $4.74 billion. The figure improved 12% from the year-ago quarter on a reported basis and 13% on FX-neutral basis. Further, it decreased 6.9% 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, positive contributions from Honey acquisition remained positive. Further, strong performance delivered by Venmo contributed to the results.

PayPal has withdrawn full-year 2020 guidance citing macroeconomic uncertainties related induced by coronavirus pandemic.

Nevertheless, the company’s diversified global platform remains a major positive. It has started witnessing activations across fashion, gaming, food and services verticals in several markets.

Moreover, its PayPal and Venmo checkout experiences have resumed contributions to TPV growth since April.

Additionally, the international cross-border volumes, which were sluggish due to COVID-19 during the first quarter, have started displaying signs of improvement.

All these factors are instilling investor confidence in the stock.

Top Line in Detail

By Type: Transaction revenues came in at $4.2 billion (91% of net revenues), up 13% from the year-ago quarter. Other value-added services generated $403 million of revenues (accounting for 9% of net revenues), increasing 2% year over year.

By Geography: Revenues from the United States came in at $2.5 billion (53% of net revenues), up 13% on a year-over-year basis. International revenues were $2.1 billion (47% of revenues), up 11% from the prior-year quarter.

Key Metrics to Consider

PayPal witnessed year-over-year growth of 17% in total active accounts with the addition of 20.2 million net new active accounts during the reported quarter. Honey buyout was a major positive in this regard as it alone added 10.2 million accounts in January. The total number of active accounts was 325 million in the quarter, which surpassed the Zacks Consensus Estimate of 311 million.

Additionally, the total number of payment transactions came in at 3.3 billion, up 15% on a year-over-year basis. However, the figure missed the Zacks Consensus Estimate of 3.4 billion.

Further, the company’s payment transactions per active account were 39.4 million, which improved 4% from the year-ago quarter, reflecting strong customer engagement on PayPal’s platform. However, the figure lagged the Zacks Consensus Estimate of 41.5 million.

TPV came in at $190.6 billion for the reported quarter, reflecting year-over-year growth of 18% and 19% on spot rate and currency neutral basis, respectively. However, the figure missed the Zacks Consensus Estimate of $196.1 billion. Coronavirus pandemic was a major headwind.

Nevertheless, year-over-year growth in TPV was primarily driven by robust Venmo, which accounted for more than $31 billion of TPV, surging 48% on a year-over-year basis driven by strong monetization efforts.

Further, merchant volume that was up 20% year over year contributed to TPV growth.

Operating Details

PayPal’s operating expenses were $4.2 billion in the fourth quarter, up 16.9% from the prior-year quarter. As a percentage of net revenues, the figure expanded 400 basis points (bps) year over year.

Consequently, non-GAAP operating margin came in at 20%, contracting 300 bps from the year-ago quarter.

Balance Sheet & Cash Flow

As of Dec 31, 2019, cash equivalents and investments came in at $10.2 billion, down from $10.8 billion on Dec 31, 2019.

PayPal had a long-term debt balance of $7.9 billion at the end of first quarter compared with $4.9 billion at the end of fourth quarter.

The company generated $1.5 billion of cash from operations, up from $1.3 billion in the previous quarter.

Free cash flow came in at $1.3 billion during the reported quarter, up from $1.1 billion in the prior quarter.

Further, the company returned $800 million to the shareholders and repurchased 7.5 million shares.

Guidance

For second-quarter 2020, PayPal expects revenues to reflect year-over-year improvement in the range of 13% at current spot rate and 15% at FX-neutral basis.

Non-GAAP earnings are anticipated to grow in the range of 15-20%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates revision. The consensus estimate has shifted 6.82% due to these changes.

VGM Scores

Currently, Paypal has a nice Growth Score of B, a grade with the same score on the momentum front. 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.

Outlook

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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