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Paypal (PYPL) Up 20.4% Since Last Earnings Report: Can It Continue?

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A month has gone by since the last earnings report for Paypal (PYPL - Free Report) . Shares have added about 20.4% in that time frame, outperforming 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 Q3 Earnings & Revenues Surpass Estimates

PayPal Holdings reported non-GAAP earnings of $1.07 per share in third-quarter 2020, which surpassed the Zacks Consensus Estimate by 13.8%. Further, the figure improved 41% on a year-over-year basis but remained flat sequentially.

Net revenues of $5.46 billion outpaced the Zacks Consensus Estimate of $5.40 billion. The figure improved 25% from the year-ago quarter on both reported and FX-neutral basis. Further, it increased 3.8% from the prior quarter.

Top-line growth was driven by growing total payment volume (TPV), courtesy of increasing net new active accounts. Further, strong performance by Venmo and merchant services contributed well to the results.

Additionally, strong growth in the company’s transaction revenues drove the results further in the reported quarter.

Further, PayPal saw positive contributions from the acquisition of Honey.

Moreover, boom in digital payment and e-commerce space owing to the coronavirus pandemic wasa tailwind.

However, shares of the company have plunged 4.8% in the pre-market trading, which can primarily be attributed to weaker-than-expected guidance for fourth-quarter earnings growth.

Nevertheless, growing proliferation of digital payments worldwide is a tailwind for the company. Further, its strong efforts toward product enhancements remain positives.

Top Line in Detail

By Type: Transaction revenues amounted to $5.1 billion (93% of net revenues), up 28% from the year-ago quarter.Other value-added services generated revenues of $383 million (accounting for 7% of net revenues), down9% year over year.

By Geography: Revenues from the United States totaled $2.8 billion (52% of net revenues), up 21% on a year-over-year basis. International revenues were $2.6 billion (48% of revenues), up 29% from the prior-year quarter.

Key Metrics to Consider

PayPal witnessed year-over-year growth of 22% in total active accounts with theaddition of 15.2 million net new active accounts during the reported quarter.The total number of active accounts was 361 million in the quarter under review.

Additionally, the total number of payment transactions came in at 4.01 billion, up 30% on a year-over-year basis.

Further, the company’s payment transactions per active account were 40.1 million, which improved 1% from the year-ago quarter, reflecting strong customer engagement on PayPal’s platform.

TPV amounted to $246.7 billion for the reported quarter, reflecting year-over-year growth of 38% and 36%on spot rate and currency neutral basis, respectively.

Notably, year-over-year growth in TPV was primarily driven by robust Venmo, which accounted for $44 billion of TPV, surging 61% on a year-over-year basis on strong monetization efforts.

Further, merchant services, which contributed 913% to the TPV and the volume generated from these services rose 40% year over year. The company witnessed above 1.5 million of merchants signing up during the third quarter.

Operating Details

PayPal’s operating expenses were $4.5 billion in the third quarter, up 21.8% from the prior-year quarter. As a percentage of net revenues, the figure contracted 200 basis points (bps) year over year to 82.1%.

Consequently, non-GAAP operating margin came in at 27%, expanding 400 bps from the year-ago quarter.

Balance Sheet & Cash Flow

As of Sep 30, 2020, cash equivalents and investments were $14.2 billion, up from $13.1 billion on Jun 30, 2020.

PayPal had a long-term debt balance of $8.94 billion at the end of the third quarter compared with $8.93 billion at the end of the second quarter.

The company generated $720 million of cash from operations, down from $2.4 billion in the previous quarter.

Free cash flow came in at $479 million during the reported quarter compared with $2.2 billion in the prior quarter.

Further, the company returned $350 million to shareholders and repurchased 1.8 million shares.

Guidance

For fourth-quarter 2020, PayPal expects revenues to reflect year-over-year improvement in the range of 20-25% at both current spot rate and FX-neutral basis.

Non-GAAP earnings, which are anticipated to grow 17-18%, are expected to bear acquisitions impact of 3 cents per share.

Additionally, TPV in the fourth quarter is likely to exhibit an improvement within the range of low to mid 30%.

For 2020, PayPal expects revenues to reflect year-over-year improvement in the range of 20-21% at current spot rate and 21-22% at FX-neutral basis.

Non-GAAP earnings, which are anticipated to grow 27-28%, are expected to carry acquisitions impact of 13 cents per share.

Additionally, TPV for 2020 is likely to exhibit growth of 30%.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted -10.91% due to these changes.

VGM Scores

At this time, Paypal has an average Growth Score of C, though it is lagging a bit 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 D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. 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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