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PayPal (PYPL) Up 13% Since Earnings Report: Can It Continue?

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More than a month has gone by since the last earnings report for PayPal Holdings, Inc. (PYPL - Free Report) . Shares have added about 13% in that time frame, outperforming the market.

Will the recent positive trend continue leading up to the stock's next earnings release, or is it 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 drivers.

PayPal Tops Q3 Earnings Estimates, Raises 2017 View

PayPal reported better-than-expected third-quarter 2017 results, beating the Zacks Consensus Estimate on both counts.

Proforma earnings of 46 cents per share beat the consensus mark by 2 cents, increasing 31.4% year over year but staying flat sequentially. Net revenue of $3.24 billion beat the Zacks Consensus Estimate by $66 million and was up 21.4% on a year-over-year basis (up 22% on an Fx-neutral basis) and 3.3% sequentially. It came ahead of the company’s own guided range of $3.14–$3.19 billion.

Revenues in Detail

Transaction revenues of $2.83 billion contributed 87% to total revenue and were up 3% sequentially and 22% on a year-over-year basis. Other value-added services revenues of $406 million contributed the rest and were up 5% sequentially and 15% year over year.

Geographically, the United States contributed 54% to total revenue, up 3% sequentially and 21% on a year-over-year basis. International revenues contributed 46% to total revenue and were up 3% sequentially and 22% year over year on an Fx-neutral basis.

In the quarter, total payment volume (TVP) was $114.04 million, growing 29% year over year on an Fx-neutral basis. The company processed 1.9 billion payment transactions, up 26% year over year. Over the trailing 12 months, payment transaction per active account was up 9% to 32.8.

Margins and Net Income

Non-GAAP operating margin of 19.9% was up 157 basis points (bps) year over year.  Non-GAAP net income of $560 million was up 31.8% year over year. Including special items, GAAP net income was $380 million (31 cents per share) compared with $323 million (27 cents per share) in the year-ago quarter.

Balance Sheet and Cash Flow

PayPal had a strong balance sheet at the end of the third quarter. Cash and short-term investments balance was $4.92 billion compared with $4.09 billion in the previous quarter. The company generated $1 billion in cash from continuing operations and spent $165 million on capex. The company has no long-term debt.

Outlook

For the fourth quarter of 2017, PayPal expects revenues to grow in the range of 20–22% on an Fx-neutral basis to $3.57–$3.63 billion. Non-GAAP earnings are expected to be in the range of 50–52 cents per share. GAAP earnings per share are expected in the range of 37–39 cents.

For 2017, PayPal increased its expectations. The company now expects revenues between $12.92 and $12.98 billion compared with its earlier expectations of $12.78 billion to $12.88 billion. Non-GAAP earnings are expected to be in the range of $1.86 - $1.88 per share compared with the earlier expectations of $1.80 - $1.84 per share.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed a downward trend in fresh estimates. There has been one revision lower for the current quarter.

VGM Scores

At this time, the stock has a nice Growth Score of B, though it is lagging a bit on the momentum front with a C. Following a similar 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 D. If you aren't focused on one strategy, this score is the one you should be interested in.

The stock is more suitable for growth than momentum investors.

Outlook

While estimates have been moving downward, the magnitude of the revision is net zero. Interestingly, the stock has a Zacks Rank #3 (Hold). We are expecting an inline return from the stock in the next few months.


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