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PayPal Is Still a Buy, Despite Its Recent Revenue Miss

By Danny Vena – Aug 19, 2019 at 8:05AM

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The results weren't bad, and analysts are beginning to say enough is enough.

PayPal (PYPL -2.96%) investors were caught off guard recently when the company reported its second-quarter earnings. It has regularly beaten both its in-house forecast and investor expectations, and raised its guidance in the wake of its strong growth, but something was amiss this quarter.

The payment processor reported revenue of $4.31 billion, up 12% year over year, and adjusted earnings per share of $0.86. While revenue landed squarely near the midpoint of management's forecast, it fell short of analysts' consensus estimates. PayPal also lowered its guidance for the first time in recent memory, causing some investors to sell first and ask questions later. This caused the stock to fall as much as 12% from recent highs, though it has recently recovered some of its losses.

The decline has led some to believe that the slide has gone too far.

The PayPal app on a smartphone on a desk with a PayPal-branded Mastercard nearby.

Image source: PayPal.

A lot going on

There were a lot of moving parts and issues that could impact the company's forecast. On the conference call, CFO John Rainey pointed out some of the key factors that contributed to the revised forecast.

PayPal has been in the midst of a "few big product integrations with partners that are experiencing delays," primarily because the company expanded the scope of the project, Rainey said. Additionally, PayPal made the strategic decision to delay certain price changes. Finally, about 20% of the company's payment volume is cross-border, and is affected by foreign currency exchange rates. The continued strength of the dollar relative to foreign currencies will be a bigger headwind in the second half of the year than previously expected. 

Analysts are jumping on board

Earlier this week, Guggenheim Partners analyst Jeff Caldwell upgraded PayPal to neutral (hold) from sell. The analyst wrote that the pessimism had peaked in recent weeks with PayPal stock falling at twice the rate of the broader market. He said that the fall was significant enough for him to end his bearish take on the stock. 

Caldwell believes the risk/reward profile has improved, particularly as European regulators will delay the implementation of Strong Customer Authentication (SCA), a move designed to improve the security of e-commerce transactions. Unfortunately, some believe the increased friction will put pressure on online sales. The delays are a net benefit to PayPal.

Wedbush analyst Moshe Katri was even more upbeat, maintaining his buy rating and $140 price target, implying more than 30% upside from the current level. After meeting with PayPal's CFO, Katri came away with his bull thesis intact, saying that the company will be able to grow its margins while continuing its strategy to monetize Venmo.

Earlier this week, Venmo added the option of instant transfers between the app and customer bank accounts for a fee. Transfers are typically free and take from one to three business days to process, giving users a fee-based option to move their money more quickly. This is the latest move by PayPal to monetize its peer-to-peer (P2P) payment app. 

Katri also sees upside from PayPal's recent strategic partnerships with electronic billing company Paymentus and Latin American e-commerce and payments leader MercadoLibre (MELI -0.23%). PayPal made a $750 million investment in MercadoLibre, giving the company a foothold in the region with 500 million combined customers.

Not the time to panic

It's important for investors to remember that forecasting is more art than science, and estimates are just that: estimates. There are plenty of reasons for companies to change their full-year guidance, and some are beyond the company's control. Ever-shifting exchange rates are a great example.

PayPal has a great business, and management is making all the right moves to make the company a global payments powerhouse. Investors don't want to miss the boat due to short-term thinking.

Danny Vena owns shares of MercadoLibre and PayPal Holdings. The Motley Fool owns shares of and recommends MercadoLibre and PayPal Holdings. The Motley Fool has the following options: short October 2019 $97 calls on PayPal Holdings. The Motley Fool has a disclosure policy.

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Stocks Mentioned

PayPal Holdings, Inc. Stock Quote
PayPal Holdings, Inc.
PYPL
$86.07 (-2.96%) $-2.63
Mercadolibre, Inc. Stock Quote
Mercadolibre, Inc.
MELI
$827.78 (-0.23%) $-1.90

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