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Why Is Paypal (PYPL) Up 9.8% Since Last Earnings Report?

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It has been about a month since the last earnings report for Paypal (PYPL - Free Report) . Shares have added about 9.8% 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 drivers.

PayPal's Earnings & Revenues Beat Q3 Estimates

PayPal Holdings reported non-GAAP earnings of 58 cents per share in the third quarter of 2018, which surpassed the Zacks Consensus Estimate by 4 cents. The figure was in line with the last reported quarter’s earnings but increased 26.1% on a year-over-year basis.

Net revenues declined 4.7% sequentially but increased 14% year over year to $3.68 billion, beating the Zacks Consensus Estimate of $3.66 billion.

The year-over-year growth in top line can be attributed to expanding customer engagement on PayPal’s platform, which significantly boosted net new active accounts in the third quarter. Further, robust performance of Venmo, One Touch and Choice drove the results.

Moreover, the company’s strategic partnerships remained positive throughout the quarter. However, sale of the U.S. consumer credit receivables portfolio to Synchrony negatively impacted revenues. Without the impact of the same, revenues would have exhibited growth of 21%.

Top Line in Detail

By Type: Transaction revenues came in at $3.34 billion (90.8% of net revenues), up 17% from the year-ago quarter. The product diversification strategy of PayPal aided the same across all its operative geographies.

Other value added services generated $340 million of revenues (accounting for 9.2% of net revenues), decreasing 10.8% year over year. This was primarily due to the sale of its U.S. consumer credit receivables portfolio to Synchrony.

By Geography: Revenues from the United States came in at $1.96 billion (53.3% of net revenues), surging 13% on a year-over-year basis. International revenues were $1.72 billion (46.7% of revenues), increasing 15% from the prior-year quarter.

Quarter in Detail

PayPal’s strategic partnerships, expanding product & services portfolio, along with strengthening presence in the global market led to massive increase in total payment volume (TPV).

Moreover, strong Venmo monetization efforts of the company remained positive throughout the quarter. It recorded 17% growth in the number of Venmo users who have actively participated in monetization activity in the quarter compared with the last reported quarter.

Further, PayPal’s monthly active user base, supported by Pay with Venmo efforts, expanded significantly in September, growing 185% from August. Additionally, the company’s partnership with Uber boosted the adoption rate of Venmo across Uber and Uber Eats platform. Also, Venmo cart contributed significantly to the growth of monthly active users of the company.

Additionally, the company’s solid initiatives toward enhancement of Choice resulted in its growing adoption worldwide.

Further, PayPal completed the buyout of iZettle. This will expand omnichannel business in the global market.

Additionally, the company announced the partnership with Itaú Unibanco Holding SA. This will allow PayPal to gain traction among the bank’s customers by offering them services.

Key Metrics to Consider

Supported by these endeavors, the company recorded 15.4% year-over-year growth in total active accounts, by the addition of 9.1 million net new active accounts during the reported quarter. The total number of active accounts was 254 million in the quarter, beating the Zacks Consensus Estimate of 251 million.

Additionally, the total number of payment transactions came in at 2.46 billion, up 27% on a year-over-year basis. The figure topped the Zacks Consensus Estimate of 2.43 billion.

Further, the company’s payment transactions per active user were 36.5 million, which increased 9.6% from the year-ago quarter. The figure lagged the Zacks Consensus Estimate of 36.6 million.

TPV came in at $143 billion in the third quarter, exhibiting 24.1% and 25% year-over-year growth on spot rate and currency neutral basis, respectively. However, the figure missed the Zacks Consensus Estimate of $145.03 billion. Nevertheless, strong performance of Venmo, which accounted for $17 billion of TPV, surging 78% on a year-over-year basis during the reported quarter.

Further, PayPal processed $57 billion in mobile payment volume, up 45% year over year, accounting for 40% of TPV.

Moreover, the company benefited from the increasing use of internet and mobile. The company recorded 112 million customers and 10.4 million merchants using One Touch in the third quarter.

Also, payment volume on P2P platform was $36 billion, up 50% from the year-ago quarter, accounting for 25% of TPV.

Additionally, merchant services volume was $127 billion, up 28% year over year. eBay volume increased 3% from the year-ago quarter, accounting for 11% of TPV.

Operating Details

Non-GAAP operating margin came in at 21.4%, which expanded 150 basis points (bps) on a year-over-year basis and 10 bps sequentially. Further, non-GAAP net income was $694 million, up 23.9% on a year-over-year basis but declined 1.3% sequentially.

Adjusted operating expenses were $3.19 billion in the third quarter, climbing 13.1% from the prior-year quarter but declining 2.7% on a sequential basis.

Balance Sheet & Cash Flow

As of Sep 30, 2018, cash equivalents and investments came in at $10.5 billion, up from $6.3 billion on Jun 30, 2018.

PayPal generated free cash flow of $4.45 billion during the third quarter compared with the negative figure of $170 million in the last reported quarter.

Guidance

For fourth-quarter 2018, PayPal expects revenues between $4.19 billion and $4.27 billion, growing in the range of 13-15% on both current spot rate and FX-neutral basis. Non-GAAP earnings are anticipated in the range of 65-67 cents per diluted share.

The company also projects stock-based compensation expense and related payroll taxes between $210 million and $230 million.

For 2018, PayPal expects revenues between $15.42 billion and $15.50 billion, growing at 18-19% at current spot rates and 17-18% on an FX-neutral basis. Further, non-GAAP earnings are expected in the range of $2.38-$2.40 per share.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 5.2% due to these changes.

VGM Scores

Currently, Paypal has a strong Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. 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 B. 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. It comes with little surprise Paypal has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.


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