PayPal (PYPL +3.78%) just reported earnings that beat expectations on both the top and bottom lines, at a time when its payments rival, Stripe, is trying to buy the company for $53 billion. Here's what investors need to know about PayPal's latest numbers and what it could mean for any takeover attempt.
PayPal's strong second quarter
As mentioned, PayPal received an offer from Stripe and private equity firm Advent to buy the company for $60.50 per share. The company reportedly views this as inadequate and would expect something closer to $70 to seriously consider a deal.
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Because of this, it was crucial for PayPal to deliver strong results. And it did.
Although EPS fell by 1% year-over-year, PayPal handily beat expectations, fueled by better-than-expected 5% revenue growth. Beyond the headline numbers, the business results look quite solid:
- Total payment volume reached $486.4 billion, up 10% year-over-year, with Venmo growth especially strong.
- Adjusted free cash flow was more than $1.8 billion, giving PayPal plenty of financial flexibility to keep buying back shares hand-over-fist and invest in its own growth initiatives.
- PayPal raised its full-year guidance for transaction margin and for adjusted EPS. Margins have been a major concern among investors, so this was certainly a nice surprise.
What does it mean for Stripe's offer?
Let's be clear. Even before this earnings report, there was a solid case to be made that PayPal's intrinsic value was significantly higher than $60.50 per share. At that valuation, Stripe was offering to pay about 11 times forward earnings for the fintech giant.
NASDAQ: PYPL
Key Data Points
However, after reporting generally excellent results, it has become much easier for management to argue that PayPal is worth far more than $53 billion.
On the company's earnings call, CEO Enrique Lores didn't directly comment on the Stripe and Advent offer, but he said the board would be open to evaluating any offer that would create more shareholder value than executing the company's growth plan. He didn't provide any context on what an attractive offer might look like, but the fact that Lores publicly took a neutral stance on a potential takeover (as opposed to saying something like "we aren't for sale") is a significant development.
To sum it up, PayPal's second-quarter earnings didn't necessarily kill Stripe's takeover efforts. Management made it quite clear that the answer to any takeover offer isn't an automatic "no." But the company's strong results raise the price that PayPal's board can realistically expect from a potential acquirer.
