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Are Visa, PayPal, & Other Payment Stocks in Trouble?

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Shares of both Visa (V - Free Report) and Paypal (PYPL - Free Report) traded down since their latest respective earnings release on Wednesday. At first glance both firms posted solid numbers, so why might investors be concerned? Let’s take a closer look.

Visa

Visa posted adjusted earnings of $1.20 per share on net operating revenues of $5.2 billion. Both metrics comfortably surpassed our Zacks Consensus Estimates and represented 39% and 1.5% respective year-over-year growth.

Visa’s key business drivers were solid growth in payment volume (+11%), cross-border volume (+10%), and processed transactions (+12%). The company was helped by favorable exchange rates and positive consumer sentiment, leading to more overall purchase activity.

Visa’s results exclude a $600 million litigation provision, which many believe is likely its settlement with merchants over a lawsuit involving card payment fees. Visa stated that the deposit has “the same effect on earnings per share as repurchasing the Company’s class A common stock.”

Considering this solid performance, investors should be satisfied, right? Visa stock movement said otherwise, trading as much as 2% lower than Wednesday’s closing price before closing sideways Thursday. By afternoon trading Friday Visa stock was still suppressed, down another 1.9%.

Cross-border volume, while higher on an annual basis, was lower sequentially. This was mainly due to a strong US dollar, which appreciated 5% in the second quarter, its largest gain since the end of 2016. This led to reduced spending by foreigners in America, fueling investor anxiety about the dollar as a short-term risk.

Still, Visa remains well-positioned for growth. The company revised its full-year guidance upward, now expecting adjusted profit to stand at the “low 30’s” per share, compared to previous levels in the “high 20’s.” Visa is also targeting increased exposure in Europe, a region where it claims cash is still the most prevalent form of payment.

Visa is also trading at an all-time high, so Thursday’s minor pullback could just be a function of investors choosing to cash out their gains. Shares of the firm have surged 43% in the last 12 months, and nearly 25% year-to-date. The company is historically well-run and hasn’t missed earnings expectations in years.

Paypal

Paypal delivered $0.58 in adjusted earnings per share on $3.86 billion in revenue. Both metrics beat our Consensus Estimates, increasing 28% and 23% on a year-over-year basis.

Paypal added 7.7 million active accounts, with net new active accounts up 18%. The firm also saw a notable 28% increase in total payment transactions to 2.3 billion. This aligns with a 29% boost in total payment volume to $139 billion. The firm’s peer-to-peer payment app Venmo, which Paypal acquired in 2014, saw a massive 78% year-over-year boost in TPV to $14 billion.

Paypal announced four acquisitions in the quarter. The Hyperwallet, iZettle, Simility, and Jetlore deals totaled $2.4 billion. iZettle was by far the largest, setting Paypal back $2.2 billion. The deal will close in the third quarter and will help the company gain exposure to the European and Latin American markets, and compete with industry rival Square (SQ - Free Report) .

But even with this news, Paypal closed down 2.5% Thursday and dropped another 4.6% by Friday afternoon. Paypal’s third quarter revenue guidance likely played a role in the downturn. Management called for Q3 revenues between $3.62 and $3.67 billion. While this falls in line with our Zacks Consensus Estimate of $3.65 billion, it fell short of some analysts’ expectations.

Another investor concern stems from the company’s decision to authorize $10 billion in stock buybacks. Normally this is a welcome move that gives value back to investors, in Paypal’s case it is seen as a sign that the company isn’t sure what to do with its money. Investors may have liked to see more reinvestments into operations.

Chief Operating Officer Bill Ready stated on Paypal’s conference call that investors were misunderstanding the results. While it is essentially part of his job to say such things, there is a compelling argument to be made here. Paypal continues to leverage strategic partnerships with Visa, Mastercard (MA - Free Report) , Facebook , Alibaba (BABA - Free Report) , as well as other large banks, to increase global exposure and attract more customers.

Paypal’s “One Touch” product also has potential to continue driving mobile growth. It allows users to make purchases through a variety of third-party websites without having to enter additional information. The firm posted 49% year-over-year growth in mobile payment volume to $54 billion, representing about 40% of TPV. This means that there is still plenty of room for development in the segment.

Plus, it hasn’t missed earnings a single time since spinning off from eBay (EBAY - Free Report) in 2015.

Outlook

While recent movement may have spooked some investors, it is still worth keeping watch on Visa and Paypal, along with other industry players, as there are some potentially exciting plays on the horizon.

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