Trading PayPal’s share price ahead of Q2 earnings; is another beat in store?

PayPal's share price is up over 38% this year having consistently beaten analyst earnings expectations. With Q2 earnings out Wednesday, we look at what is driving growth and ask if another beat is in store.

How PayPal performed last quarter?

PayPal smashed analyst expectations in Q1 to deliver a 31% jump in profits compared to the same quarter the year before. Earnings per share came in at $0.78, handily beating the $0.68 expected by analysts. Revenue came in at $4.12 billion, up 11.6%, while the total number of transactions processed jumped by 28% to 2.8 billion. 

However, total payment volume of $161 billion - arguably the key metric to watch - missed the expected $163 billion.

Will PayPal deliver another earnings beat?

Analysts expect adjusted earnings of 69 cents a share, an 18% increase from the 58 cents seen a year ago, according to a FactSet survey. Revenue is forecast at $4.33 billion, up almost 13%. Total payment volume is pegged at $171.8 billion.

Yet, PayPal has form in beating analyst expectations. On Zacks, PayPal’s earnings per share last quarter delivered a 16.42% surprise on expectations. In the quarter before that, the surprise came in at 2.99%. PayPal has an earnings ESP (Earnings Surprise Prediction) of 14.38%, which, according to Zacks is a sign that the company looks set to again beat expectations on Wednesday.

What to look out for?

MercadoLibre Inc investment pays off

PayPal said last week that their Q2 release is set to get a big boost from strategic investments. This points to PayPal’s $750 million investment in Argentine e-commerce giant MercadoLibre Inc. The tie-up should help to boost cross border payment volume, with the potential to add $218 million to earnings.

Following the announcement, PayPal’s share price was up 2%, and MercadoLibre shares are soaring right now – up a massive 110% since the start of the year.

Venmo continues to grow

Venmo payments volume grew 73% year-over-year in the first quarter. The payment app has notched up 40 million users and is popular among a young audience thanks to its comments feature. After being criticised for not making money off Venmo, PayPal is now actively looking for ways to monetize the free-to-use app. Ideas include Venmo branded credit and debit cards, and charging a small fee for sending faster payments. 

Partnership revenue

PayPal has been busy partnering with other tech companies, including Facebook-owned Instagram and ride-sharing app Uber. Since separating with eBay, PayPal has used these types of partnerships to boost its customer engagement and revenues, with major credit card companies, Facebook, Alibaba, and Alphabet all among the company’s impressive client list. Any signs that these partnerships are adding to the bottom line could see the share price jump.

Is PayPal a “Buy”?

Despite the rocketing share price, the consensus price target is just above $120. This would deliver just over 1% upside on the current price. Yet, Barclays analyst Ramsey El-Assal is more optimistic, writing in a note to clients: “The broader digital spending backdrop remains healthy, and we expect another solid quarter of volume growth, user adds and financial performance from PayPal.”

PayPal share price vitals, Yahoo finance, 22 July 2019

El-Assal has pinned a $135 target on the stock, which would represent a 14% gain. 

When PayPal updates investors this week expectations will be for more Venmo growth, on top of the positive signs from the MercadoLibre investment. That being the case, now could be the time for traders to buy the stock to capture a post-earnings bounce. They’ll have to be fairly certain on future revenue and earnings potential though; the stock’s P/E ratio comes in at 64.16 for the twelve trailing months - way above industry and sector averages.