Shares of PayPal (PYPL - Free Report) surged Monday despite reports that a U.K. antitrust watchdog has concerns about its multi-billion-dollar purchase of iZettle. On top of that, PayPal’s Venmo app has been hurt by fraud. Still, PayPal stock appears like a buy at the moment amid the larger digital payment revolution.
PayPal’s $2.2 billion acquisition of small business commerce firm iZettle, which closed in late September, has come under fire from the U.K. Competition and Markets Authority. The company might end up facing pressure to unwind or divest parts of its iZettle transaction in the U.K. unless it addresses the U.K. watchdog’s concerns.
The British regulator noted on Monday that it is worried that PayPal’s purchase could lead to higher prices and a lack of competition in the region, and ultimately harm both companies’ clients and consumers. PayPal said it is working to address these concerns.
The Stockholm-based firm, which has been called the “Square of Europe,” operates heavily in Europe, Mexico, and Brazil. PayPal made the deal to bolster its business to stand out against rivals such as Square (SQ - Free Report) and to curb the encroachment of giants like Amazon (AMZN - Free Report) .
Moving on, PayPal’s widely popular peer-to-peer payment app Venmo has reportedly dealt with higher levels of fraud than the company originally projected, according to a Wall Street Journal report over the weekend. Venmo, which allows users to pay their friends via their bank accounts and credit cards, has seen its expenses related to fraudulent transactions rise.
PayPal’s Venmo unit posted an operating loss of about $40 million during the first three months of 2018, which was roughly 40% larger than what it projected. The fintech company’s “transaction loss rate” that encompasses losses related to fraudulent charges jumped from roughly 0.25% of overall Venmo volume in January to 0.40% in March.
Venmo’s fraud issues have not been talked about much up to this point. But it seems almost obvious that fraud would be an issue for the p2p platform and its peers in an age where cybersecurity threats impact nearly every company in the world. Venmo Fraud can range from paying people with stolen credit cards to hacking and draining real user accounts.
Venmo has helped increase PayPal’s user base and its overall transaction count, but the p2p platform isn’t making the company money yet. In fact, Venmo costs PayPal money through fraud-based refunds. Plus, the company doesn’t even charge most of its users to complete transfers.
PayPal has launched Venmo offerings that generate more revenue. This includes charging users a fee to transfer money from the app to pay for Uber rides, among other things. On top of that, PayPal bought Hyperwallet for roughly $400 million in June to help it expand its global payout capabilities. The firm also acquired fraud prevention and risk management firm Simility, which could help it combat its recently reported Venmo fraud woes.
PayPal, which officially spun off from eBay (EBAY - Free Report) in 2015, boasted 254 million active accounts at the end of the third quarter, up 15% from the year-ago period. The company has also actively expanded to become a more complete financial services firm. This includes offering loans of up to $500,000 to their business clients.
Outlook & Earnings Trends
Looking ahead, our current Zacks Consensus Estimate is calling for PayPal’s Q4 revenues to jump 13.2% to reach $4.24 billion. Meanwhile, PYPL’s fiscal year revenues are projected to reach $15.46 billion, which would represent over an 18% climb.
At the bottom end of the income statement, PayPal’s adjusted quarterly earnings are projected to jump by 21.8% to hit $0.67 per share. The company’s full-year EPS figure is expected to expand by 25.8%. Plus, PayPal has also experienced a ton of positive earnings estimate revision activity over the last 60 days for Q4 as well as for fiscal 2018 and 2019.
PayPal is currently a Zacks Rank #2 (Buy) based on its recent positive earnings revision trends. Shares of PYPL closed regular trading Monday up 3.7% at $80.86 per share, which marked a roughly 14% downturn compared to its 52-week high.
We should also note that PYPL stock is currently trading at its lowest earnings multiple over the last year at 35.3X forward 12-month Zacks Consensus EPS estimates. PayPal stock has traded as high as 55.8X over the past 52 weeks, with a one-year median of 43X.
Clearly, some of PayPal’s fundamentals appear strong and it might be a stock to consider amid the larger fintech expansion. But it is worth paying attention to the U.K. antitrust worries and its Venmo fraud issues.
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