Can PayPal’s share price cash in on bumper earnings?

Payment solutions and merchant service providers have been better suited than most to weather the decrease in cash usage caused by the coronavirus pandemic. PayPal’s [PYPL] share price has skyrocketed 134.3% (through 28 October) since it fell to a 52-week low of $82.07 on 23 March. The company is expected to report its third-quarter earnings on 2 November and, if it can repeat the success of its second-quarter earnings, PayPal’s share price could continue to rally.

PayPal’s share price has registered a year-to-date climb of 77.7% to $192.31 (as of 28 October’s close). The stock has been riding a strong tailwind of positive sentiment since launching a cryptocurrency service on 21 October. The news sent PayPal’s share price up 6.8% to an intraday high of $215.83 before it closed at $213.17.

Although the stock has since pulled back slightly, there’s reason to believe that PayPal’s share price will go higher following a robust third-quarter earnings report.

Value in Venmo

PayPal’s share price benefitted from strong earnings during the second quarter, supported by the rapid rise in online transactions and people using contactless and digital payment methods.

For the three months ended 30 June, PayPal delivered $5.26bn in revenue, a 22% increase on the $4.31bn posted in the year-ago quarter. Earnings were $1.07 per share, up 49% year-over-year. Analysts had been expecting $4.99bn in revenue and earnings of $0.88, according to Investor’s Business Daily.

One of the best-performing parts of PayPal’s business had been its peer-to-peer payment app, Venmo. The total payment volume processed in the second quarter was $222bn, up 29% year-over-year. Venmo accounted for $37bn or 17% of the total, which marked a 52% year-over-year increase.

As of the end of June, the app added 21.3 million new active accounts, up 21% year-over-year — its strongest quarter in history — bringing total active accounts to 346 million customers.

On the earnings call, Dan Schulman, president and CEO of PayPal, said that the company had added 1.7 million new merchant accounts during the quarter. He also said that the company’s reward platform Honey added three times that of the first quarter.

Having previously withdrawn its 2020 guidance, PayPal has now forecast a 23% year-over-year increase in revenue for the upcoming quarter. It also expects earnings to grow 25% from the year-ago period. Total payment volume is expected to increase by nearly a third. Meanwhile, the consensus among analysts, according to Zacks Equity Research, is for revenue to grow 23% to $5.4bn and earnings per share to lift 54% to $0.94.

A boost from digital services expansion

PayPal is in a strong position to beat its third-quarter forecast. At the end of July, it introduced QR code technology that enables shoppers to pay for their goods at brick-and-mortar retailers using their PayPal or Venmo accounts. It was announced that CVS Pharmacy [CVS] would be the first retail chain to integrate the technology into its in-store experience in the fourth quarter.

Although an increasing number of stores are closing their doors due to the financial impact brought about by the pandemic, innovative solutions that bridge the gap between traditional retail and digital payments should be a boon for PayPal’s share price in the long-term.  

Deutsche Bank’s Bryan Keane reiterated a Buy rating on the stock at the end of September and set a price target of $234, which would imply a 21.6% increase from PayPal’s share price as of close of trading on 28 October. 

In a note to clients, seen by Barron’s, Keane argued that the company “could actually show accelerating trends through the [Q3 2020] quarter and sustainable higher long-term growth”.

Keane sees no reason why the growth in new sign-ups can’t continue and notes that there’s been a particular willingness among “silver tech” seniors to ditch cash for digital payments. 

Despite a PE ratio of over 88 as of 28 October, Wall Street analysts seem to be in agreement that PayPal is worth investing in.

The consensus among 39 analysts polled on MarketBeat is to Hold the stock. One analyst rates PayPal a Strong Buy, 33 a Buy and five a Hold. The consensus 12-month target of $201.82 represents a 4.9% uptick on PayPal’s share price at close on 28 October.

PayPal share price vitals, Yahoo Finance, 29 October 2020