PayPal is scheduled to release its next earnings report on Jan. 27, which will be its second report since it was spun off from eBay last year. The consensus estimates are net revenues of $2.5 billion and earnings of 34 cents per share. All eyes will be watching the report as the company’s stock was one of the top hedge funds’ biggest buys during the third quarter.
PayPal rolls along on strength in digital commerce
Much of Wall Street is concerned about PayPal’s upcoming earnings report because the National Retail Federation reported that holiday sales were weaker than expected. However, MA Spending Pulse reports that online sales during the holiday shopping season grew 20%, and comScore reports that mCommerce accelerated to a 59% year over year growth rate.
Deutsche Bank analyst Bryan Keane and his team note that the second two trends are especially important for PayPal—even more important than the first metric. They add that their channel checks suggest that the digital payments platform is gaining share within the market and moving beyond just desktop spending. Also past trends have put PayPal’s growth ahead of eCommerce growth:
What to expect in PayPal’s earnings report
They are expecting PayPal to report adjusted net revenues of $2.455 billion for the fourth quarter, putting them slightly behind the consensus. They’re anticipating $2.215 billion in transaction revenues and $243 million in other value-added services. For total purchase volume, they’re expecting $78.256 billion.
As a reminder, management guided for total purchase volume growth in the mid-20% range and 15% to 18% revenue growth on a currency neutral basis. They expect non-GAAP earnings of $1.23 to $1.27 per share.
Market share gains to offset lower holiday spending
During the third quarter, PayPal reported a 34% growth rate in total purchase volume, representing twice the growth rate of global eCommerce on the back of strong share gains. Adoption of Venmo, Braintree and One Touch also began in 23 countries with more than 1 million merchants and more than 10 million consumers using the platforms.
Over two years, Braintree has seen the number of cards on file grow by four times, bringing it to 185 million. This platform enabled PayPal to build out its payments platform even further as some of the most important new merchants like Uber and AirBnB adopt it. Further, the Deutsche Bank team notes that Venmo’s volumes climbed 200% in the third quarter, reaching $2.1 billion, and they anticipate that as more and more merchants accept the payments service, its growth will accelerate, thus providing possible incremental revenue growth going forward.
PayPal’s international payments also climbed 25% in constant currency during the third quarter, and Keane expects the company to leverage Xoom to expand this even further, especially in Mexico, India and the Philippines. Additionally, he said the shift toward mobile payments is still providing a tailwind for PayPal as volumes grew 42% during the third quarter. Small business lending provides even more opportunities, he added.
Another bonus for the company is the fact that a recent survey indicated that half of U.S. consumers prefer using PayPal rather than their bank, although Apple Pay is catching up quickly with already 20% despite its newness.
PayPal can boost margins with scale
The Deutsche Bank analyst and his team added that as PayPal grows, it will be able to leverage its economy of scale to expand its margins at a sustainable rate. He said take rate and transaction margins will fall as a result of mix because of factors like Venmo’s and Braintree’s rapid growth. Also hedging and one-time gains will lessen, and larger merchants will continue to sign on to the company’s various payment platforms.
However, he believes “‘like for like’ pricing” is still stable and believes overall operating margins will move higher. Currently PayPal enjoys a 25% to 30% global share of eCommerce, plus fixed cost leverage at 42% in the third quarter. Keane adds that “re-platforming” in some areas should also expand margins.
He expects the payments process to continue its acquisition strategy in the near future as well. He also expects PayPal to continue focusing on organic investment and announce a share repurchase program on the fourth quarter earnings call, plus revenue and earnings per share guidance for this year.
Shares of PayPal edged higher by as much as 0.26% to $31.28 per share today, putting them on track to erase Wednesday’s slump.