Can PayPal Continue Win Streak When It Reports Q2 Earnings?

The company has made an unexpected strategic investment to expand its payment processing empire.

Danny Vena
Danny Vena
Jul 20, 2019 at 10:46AM
Technology and Telecom

When PayPal (NASDAQ:PYPL) reported first-quarter revenue in line with analysts' estimates and better-than-expected earnings per share three months ago, the stock climbed 3% on the day after its report. But that rise was just one step in PayPal's relentless 2019 climb. Overall, the stock is up roughly 41% so far this year.

On Wednesday, the payment processing specialist will be back in the news with its Q2 financial report. For PayPal investors, the focus will be on whether the company can maintain this strong momentum. Here are three metrics stock watchers will be paying particular attention to when earnings are released after the closing bell.

The PayPal logo in front of the company's headquarters building.

Image source: PayPal.

1. Revenue growth

PayPal's revenue rose 12% year over year in Q1, though that number was adversely affected by the sale of its portfolio of consumer receivables to Synchrony Financial. Adjusting for that one-time event, revenue increased by 19%.

For Q2, PayPal has guided for its solid growth to continue, with revenue expected to increase by 11% to 13% year over year, or by 12% to 13% after excluding the impact of changes in foreign currency exchange rates.

From the perspective of Wall Street, analysts' consensus estimate calls for revenue of $4.33 billion, up about 12% year over year, which is at the midpoint of management's guidance.

2. Earnings per share

During Q1, PayPal reported adjusted earnings per share of $0.78, easily surpassing the $0.68 high end of management's guidance, which also matched analysts' consensus estimates.

PayPal explained that $0.08 per share of that result derived from its recent equity investment in MercadoLibre. PayPal announced in March that it had laid out $750 million to tap the ongoing adoption of e-commerce and fintech in Latin America, and had been impressed by the company's management.

In a recent regulatory filing with the Securities and Exchange Commission, PayPal said it expected to report a pre-tax gain of $218 million from its strategic investments, which is expected to result in a benefit of about $0.14 per share in Q2. 

PayPal had previously guided for adjusted EPS in a range of $0.68 to $0.70 per share. Wall Street clearly believed that management is being too conservative in its forecast, with expectations for EPS of $0.71.

3. A growing and highly engaged user base

PayPal has been able to consistently put up strong revenue and earnings numbers because of its ability to expand its user base and to increase the engagement of its existing users. The company added 9.3 million net new active accounts during Q1, bringing its total to 277 million, up 15% year over year. It expects to exceed 300 million active accounts by year's end. 

The number of transactions per active account, which is an indicator of engagement, grew to 38, up 9% compared to the prior-year quarter.

One of the highlights of its user base activity is the rapidly growing use of Venmo. While it began as a free person-to-person (P2P) payment app, it can now be used to pay merchants anywhere PayPal is accepted. The company recently revealed that Venmo has grown to more than 40 million active users, and those customers are driving significant increases in total payment volume, up 73% year over year in Q1. Venmo is on pace to process nearly $100 billion in transactions in 2019.

Watch for additional updates on PayPal's growing active user base.