U.S. stocks are slightly lower on Thursday afternoon, with the Dow Jones Industrial Average (DJINDICES:^DJI) and the S&P 500 (SNPINDEX:^GSPC) down 0.20% and 0.06%, respectively, at 12:45 p.m. EDT. Shares of payments company PayPal Holdings Inc are underperforming, down 1.74%, as traders react with disappointment to the company's first post-eBay earnings report (see below).
Just going by the headlines, you'd think payments company PayPal's first earnings report since splitting from eBay Inc at the beginning of July was pretty rotten. Here's a sample (my emphasis):
PayPal Misses Revenue Forecasts in First Earnings Report Since EBay Split (Forbes)
Ebay Exceeds Expectations While PayPal Flops (Bloomberg)
PayPal stumbles in first earnings after splitting from eBay (Fortune)
But here's a dirty secret about the way financial journalism works: Headlines need to be concise and punchy. Okay, that's pretty obvious, and it's hardly unknown to readers; however, the effects are a little more insidious.
As a result of those twin imperatives, the most effective headline strategy is to choose a positive or negative angle and overstate it. That's how you end up with headlines that shout "Dow plummets!" to describe a 2.5% decline.
The reality is typically too complex to be well-captured in a pithy black-or-white statement. Unfortunately, those headlines color the way we read an article, and that's assuming we read it at all instead of simply moving on to something else and just remembering the headline.
Here's another dirty secret: Most (but not all) financial journalists have neither the training nor the time to independently analyze an earnings report.
The easiest thing for a journalist to do is to look at the stock price, and then go looking for any evidence that might explain the stock price reaction. That is news -- of a sort.
However, even if the evidence that is unearthed explains the price reaction, it doesn't necessarily justify it -- that's a crucial distinction (the market has been known to overreact or misinterpret breaking news, after all).
Making that distinction is where journalists (or analysts) could add a lot of value, but for the most part, they aren't in that line of work.
(There are some exceptions, including the Financial Times' Lex column, Reuters Breakingviews, The Wall Street Journal's Heard on the Street and...The Motley Fool.)
Now, back to PayPal. From all of the data relating to the third quarter, the financial press and the market appear to have singled out two (negative) things today:
- The company missed the consensus estimate for revenues, with $2.258 billion versus $2.276 billion.
- PayPal's "take rate," the average fee in percentages terms it receives for processing transactions, declined from 3.24% from 3.39% in the year-ago quarter.
Let me be clear about this: The first of the two is absolutely meaningless in the context of PayPal's long-term value. This is a miss of less than 1% that represents $18 million. The overwhelming likelihood is that this is simply a result of quarterly volatility in operating results.
The decline in the take rate may have some meaning, but it's impossible to tell at this stage, without the benefit of a longer frame of reference.
Here's the bottom line for this financial columnist: The data included in the earnings release, including a 14% year-over-year increase in revenues (+18% on an currency-neutral basis) and a 200 basis point increase in the non-GAAP operating margin, look more than adequate to support the stock's current valuation. At 24.7 times the next 12 months' earnings-per-share estimate, the shares still look attractive (though not as much as they did during their summer swoon, when they traded below $31).
Alex Dumortier, CFA, has no position in any stocks mentioned. The Motley Fool owns shares of and recommends eBay and PayPal Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.