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Can Q3 earnings help PayPal’s share price to recover?

Financial technology major PayPal [PYPL] is forecast to report 14% on year revenue growth but only 1% earnings growth when it reports its third-quarter earnings on 8 November. Analysts at Zacks expect PayPal to report earnings of $1.08 per share in its Q3 report on revenues of $6.22bn.

PayPal has been buoyed by the rocketing demand for e-commerce and digital payments during the COVID-19 crisis.

“PayPal ... is uniquely positioned to address the massive opportunity in digital payments,” says the group’s CFO and EVP global customer operations John Rainey.

However, it has experienced some major wobbles in recent weeks including the online marketplace eBay’s decision to start paying its sellers directly rather than through PayPal.



Acquisition history

PayPal share price dived on rumours it was looking at acquiring social media group Pinterest potentially for $45bn. The move would have hurt the company’s profits and margins.

The payments company later clarified that it was not looking to buy the company. However, analysts believe the rumours may not have been unfounded. The rationale behind such a move would be to develop a social commerce offering to its core tech payment product.

Investors remain cautious about PayPal’s other social payment platform acquisition Venmo, according to S&P Global. The fintech company acquired Venmo in 2013 but it is “yet to yield significant returns for its parent, despite launching cryptocurrency payment options in April”.

“Venmo’s improving monetisation efforts and rising adoption rate across various platforms are aiding the total active accounts growth,” said Zacks.

“Venmo’s improving monetisation efforts and rising adoption rate across various platforms are aiding the total active accounts growth” - Zacks analysts


Despite being in one of the hottest tech segments, PayPal’s share price lags its peers. Over the last 12 months its share price has climbed 19% to reach $231.28 at close on 1 November, compared with Google Pay owner Alphabet [GOOGL], which has climbed 77%, and Shopify [SHOP] up 46% to the same date.


Share price expected to grow

PayPal’s quarterly outlook forecasts revenues in the range of $6.15bn to $6.25bn in the quarter to September 30.

Zacks sits on the fence on its call on PayPal. On one hand, fundamentals look good and on the other competition, exchange fluctuations and interest rates remain risks for the PayPal stock price.

According to Market Screener, a consensus of 45 analysts has a ‘buy’ rating on the stock and an average target price of $234.94.


An essential service

In Q2, PayPal beat expectations to report earnings per share of $1.15 compared with expectations of $1.12. Its revenues came in at $6.24bn compared with forecasts of $6.27bn. Net profit fell 23%, while revenues were up 19%.

Total payment volume grew 40% to $311bn, while Venmo payment volume grew 58% to $58bn.

PayPal said the eBay decision was a “short-term drag” on growth but that the transition would be completed by the end of the third quarter, reported by CNBC. “PayPal has evolved into an essential service in the emerging digital economy,” said Dan Schulman, president and chief executive (pictured above).


PayPal's Q2 revenue


Expanding into social

MoffettNathanson analyst Lisa Ellis thinks Pinterest could, if successfully integrated, have the potential to strengthen PayPal’s offering and differentiation.

However, as reported by S&P, Ellis warned that effectively integrating the two platforms could distract PayPal from international expansion and breaking further into digital banking.

"Given the number of (arguably lower-risk) growth vectors available to PayPal (e.g. international expansion, digital banking, new payment flows), a $45bn capital allocation to expand into online advertising carries a weighty opportunity cost," Ellis said.

Analysts will certainly quiz management about international growth hopes and those digital banking opportunities. There will also be interest in their view of the eBay decision in the summer and how impactful it continues to be, as well as the growth of digital payments and cryptocurrency post-pandemic.

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