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PayPal is Delivering Strong Results, But Growth Slows

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Stock (Symbol)

PayPal Holdings (PYPL)

Stock Price

$85

Sector
Financial
Data is as of
August 17, 2018
Expected to Report
Oct 17
Company Description
PayPal Holdings, Inc. is a technology platform and digital payments company that enables digital and mobile payments on behalf of consumers and merchants. The Company’s combined payment solutions, including its PayPal, PayPal Credit, Braintree, Venmo, Xoom and Paydiant products, compose its Payments Platform. It offers consumers person-to-person payment solutions through its PayPal Website and mobile application, Venmo and Xoom. Source: Thomson Financial
Sharek’s Take
David SharekPayPal (PYPL) is delivering impressive results, but profit growth just slowed from 30% to 26% last qtr, and I feel it will be 22%-24% this qtr. Here’s a few bullet points from last qtr:

  • 23% gain in revenue.
  • Total Payment Volume (TPV) up 27%.
  • Added 8 million accounts for the 2nd consecutive qtr, and ended the qtr with 244 million users, up 15% since last year.
  • Mobile volume growth was 49% with $54 billion processed. Mobile checkout is 39% of TPV.
  • Person-to-person volume (PayPal, Venmo, Zoom) grew 50% and accounted for 24% of TPV.

Paypal has three catalysts: 

  1. Venmo is a free digital wallet that lets you make and share payments with friends for free (such as splitting dinner), and move money from Venmo to your bank in one day. Merchants pay 3% if you pay them with a credit card (that’s about what PayPal charges). Venmo payment volume rose 80% last qtr to $12.3 billion, 9% of PYPL’s $132 billion total.
  2. Xoom allows you to transfer money to other countries, and even let’s you ask for money from someone. Xoom is a big help to immigrant workers in the U.S who send money home.
  3. One Touch is what management calls the standard forspeed & simplicity for mobile checkout. TPV was $49 billion last qtr, up 52% yoy, and was 37% of total sales.

Last qtr PYPL was growing around 30% with a P/E of 35. This qtr it’s growing around 25% with a P/E of 37. Slower growth and a higher valuation — not good. I’m taking my Fair Value P/E down a bit from 37 to 35, which equates to $82 this year and $99 next year. The stock’s around $85 now, thus I don’t foresee much movement in the coming months. Still, this is a solid selection long-term. Growth is good and management also buys back billions in stock, but doesn’t pay dividends.

One Year Chart
PYPL tried to break out recently, but with slowing results it came back down. The Last qtr the company beat the street by 2 cents. It had previously beaten by 3 cents in each of the last 5 qtrs. Qtrly profit Estimates are 17%, 20%, 18% and 16%. If PYPL beats by 2-to-3 cents the next 4 qtrs that would mean low-20s growth. The Est. LTG of 19% is good but not great. The P/E was just 31 three qtrs ago, the stock was a better value then.
Fair Value
2018 estimates stayed the same this qtr. I don’t think a stock can get great momentum if annual estimates aren’t rising. My Fair Value P/E is getting cut a little this qtr, from 37 to 35. Last qrt my Fair Value was a stock price of $87 and I pretty much hit that on the head. This qtr it’s $82.
Bottom Line
PayPal continues to drive results higher as people are using their phone more and more to make purchases and send money. The stock’s been a good one since its IPO, but has had periods where it didn’t move much. I feel this is one of those times, and am not bullish on the shares at this time. This is still a solid buy-and-hold name with great growth opportunity, so I wouldn’t suggest selling out unless you have an itchy trigger finger that’s looking for immediate gratification.  PYPL is ranked 30th in the Growth Portfolio Power Rankings. 
Power Rankings
Growth Stock Portfolio

30 of 39

Aggressive Growth Portfolio

N/A

Conservative Stock Portfolio

N/A

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David Sharek David Sharek is stock portfolio manager and CEO of DavidSharek.com. David believes a company's profits ultimately drive the price of its stock. His book The School of Hard Stocks can be found on Amazon.com.