PayPal Holdings Could Offer Low-Risk Buying Opportunity

PayPal Holdings Inc. (PYPL) posted stronger-than-expected Q2 2020 earnings in July, booking a profit of $1.07 per-share on an impressive 22% revenue increase to $5.26 billion. The accelerated transition from paper to digital payment transactions underpinned the blowout results, completing a breakout above short-term resistance in the mid-180s. The uptick reversed above 204 last week, setting up a potential low-risk buying opportunity in coming sessions.

Paypal Opens Millions Of New Accounts

Total Payment Volume (TPV) increased 29% to $222 billion while PayPal opened more than 21 million new accounts, marking the strongest quarterly growth since the company came public in 2015.  The outlook for future quarters is equally bullish, with the COVID-19 pandemic signaling a paradigm shift into contactless payment systems.  The stock could post outsized gains well into 2022, given these historic tailwinds.

President and CEO Dan Schulman discussed the bullish metrics, stating” we have seen substantial macro changes that we believe will have a lasting and profoundly positive impact on our business. The world has accelerated from physical to digital across multiple industries including retail. Merchants are embracing a digital-first strategy, and these trends have fueled the rapid rise of digital payments. These are durable and meaningful tailwinds.”

Wall Street And Technical Outlook

Wall Street rates PayPal as a ‘Strong Buy’, based upon 28 ‘Buy’ and 5 ‘Hold’ recommendations. No analysts are recommending that shareholders sell their positions at this time. Price targets currently range from a low of $155 to a street-high $235 while the stock is now trading $15 below the median $209 target. The company carries a lofty 89.53 price-to-earnings ratio (P/E), lowering odds for further upgrades until Q3 performance trends become more transparent.

PayPal has posted a return in excess of 60% since breaking out above 2019 resistance near 120 in May, setting off overbought technical readings that have added fuel to the current downturn. The earnings news triggered a small breakaway gap between 184.75 and 190 while the stock is now trading near 194. Selling momentum could increase into this major support zone, signaling a ‘buy-the-dip’ trade that could book opportune profits.

PayPal Registers 52-Week High As Earnings Top Forecasts

PayPal Holdings, Inc. (PYPL) jumped 4.73% Wednesday after the San Jose digital payments company reported better-than-expected second-quarter (Q2) results amid surging e-commerce transactions during the pandemic. Adjusted earnings came in at $1.07 a share, up from 71 cents a year earlier and well ahead of the analysts forecast of 87 cents a share. Revenues also impressed, registering $5.26 billion in the quarter compared to Street expectations of $4.99 billion.

Chief Executive Officer Dan Schulman believes the company will continue to benefit from changing consumer preferences brought about by pandemic. “Simply put, our business has never been more relevant and important in the midst of the Covid pandemic. We have seen substantial macro changes that we believe will have a lasting and profoundly positive impact on our business,” he told investors during the earnings call, per Barron’s.

Through Wednesday’s close, PayPal stock has a market capitalization of $216.72 billion and trades 70% higher on the year. In the past three months alone, the shares have gained nearly 50% as of July 30, 2020.

Transaction and User Growth

Total Q2 transactional volume through the platform climbed to $222 billion, $12 billion above what analysts had expected and up from $172 billion in the year-ago quarter. The company added 1.7 million new merchant users during the quarter as businesses moved to accommodate a shift to contactless payments. Meanwhile, PayPal’s person-to-person payment service Venmo processed $37 billion in payments. Looking ahead, the company expects total payment volume to grow 30% in the third quarter.

Wall Street View

Analysts remain overwhelmingly bullish, despite the stock trading 71% above its five-year average projected earnings multiple. Currently, it receives 32 ‘Buy’ ratings, 4 ‘Overweight’ ratings, and 7 ‘Hold ratings. Just one analyst recommends selling PayPal shares. Wall Street has placed a 12-month price target on the stock at $186.36, indicating a 6% premium to Wednesday’s $184.60 close.

Technical Outlook & Trading Strategy

Since bottoming out in the low 80s at the height of the pandemic selloff, PayPal shares have remained in a steady uptrend. Gains accelerated after the stock gapped up by more than 14% in mid-May when the accompany announced it saw a record day of transactions earlier that month. Yesterday’s blowout earnings report added fuel to the fire, propelling the price to a new 52-week / all-time high on above-average volume.

Active traders who want to play the bullish momentum should consider using a 15-day simple moving average (SMA) to ride the trend as far as possible. To implement this strategy, stay in the position until the stock closes below the indicator. If the PayPal reverses at these levels, look for a possible decline to major support at $124, where price finds a confluence of support from the February swing high and 200-day SMA.

Buy PayPal; Target Price $210 in Base-Case and $240 Under Most Bullish Scenario

PayPal Holding Inc, a leading global payments platform, reported that its second-quarter profit surged 86%, the strongest quarterly performance in the company’s history, largely due to a solid rise in e-commerce transactions and new active accounts, sending its shares up about 5% in extended trading after hitting all-time high earlier in the day.

The digital payment service company said its second-quarter net income surged to $1.53 billion, or $1.29 per share, compared to $823 million, or 69 cents per share, the same period a year ago. Revenue jumped 25% to $5.26 billion.

PayPal anticipated the trends to continue and forecast earnings per share for 2020 to rise nearly 25% on more than 20% revenue growth.

“The COVID-19 induced shift to digital is providing significant tailwinds to PayPal’s business –with record 2Q results meaningfully exceeding expectations across the board. Importantly, we believe the increases in key business drivers are sustainable. We expect the stock to be strong on July 30,” said George Mihalos, equity analyst at Cowen.

PayPal said its added 21.3 million NNAs, bringing total active accounts to 346 million accounts, up 21%. The digital payment service company processed $222 billion in payments, up 29% on a spot basis and 30% foreign exchange. Merchant Services volume grew 28% and Venmo processed approximately $37 billion in TPV, growing 52%.

“We remain overweight on PayPal as secular e-com tailwinds, coupled with greater habituation opportunity in a post-COVID-19 environment, should allow the company to grow volumes above the rate of e-com (ex-Amazon). With greater profitability on the horizon, we see an opportunity for compounding 20%+ earnings growth,” said James Faucette, equity analyst at Morgan Stanley.

Executives’ comments

“In the midst of the COVID-19 pandemic, digital payments have become more important and essential than ever. Our record performance in the second quarter – our strongest quarter ever – reaffirms the relevance of PayPal in the unfolding digital future. We’re committed to supporting our consumers and merchants as they work to safely navigate this new reality,” said President and CEO Dan Schulman.

“Our second-quarter performance highlights the benefits of PayPal’s diversification and scale, and our resulting earnings power. We delivered 25% revenue growth on a currency-neutral basis, 49% growth in non-GAAP earnings per share, and generated $2.2 billion in free cash flow,” said CFO and EVP Global Customer Operations John Rainey.

PayPal stock forecast

Several equity research firms upgraded their PayPal’s stock outlook just after the result. RBC raised its target price to $212 from $192; Jefferies raised its target price to $230 from $210; Credit Suisse upped its price objective to $205 from $190; Piper Sandler raised its target price to $228 from $210. Canaccord Genuity raised it to $218 from $190. Morgan Stanley target price is $206 with a high of $239 under a bull scenario and $105 under the worst-case scenario.

We think it is good to buy at the current level and target at least $210 in the short-term and $240 in a best-case scenario as 100-day Moving Average signals a strong buying opportunity.

On the other hand, thirty-three analysts forecast the average price in 12 months at $184.14 with a high forecast of $215.00 and a low forecast of $132.00. The average price target represents a -0.25% decrease from the last price of $184.60. From those 33, 27 analysts rated ‘Buy’, six analysts rated ‘Hold’ and none rated ‘Sell’, according to Tipranks.

Analysts’ comments

“PayPal, one of our top OWs, is the preferred digital wallet option for non-Amazon merchants, as evidenced by its online acceptance lead vs. other digital wallets and industry-low attrition. PayPal’s efforts to offer a seamless and secure checkout experience ties its TPV growth rate with the secular growth of eCommerce,” Morgan Stanley’s Faucette.

“As consumers increase their habitual use of PayPal, the company should grow its TPV at or above the rate of eCommerce (ex-Amazon). Venmo and partnership monetization should offer additional TPV and revenue growth, while operating leverage from its scale support 20%+ earnings growth over the medium term, despite near-term headwinds from eBay and macro impacts,” he added.

“Estimates move higher for ’20 and ’21; PT to $230. We raise our estimates to account for the momentum in the business and the updated outlook for 3Q/FY20. FY20 EPS goes to $3.68 (from $3.24) and our 2021 EPS moves to $4.34. PT increases to $230, reflecting better growth and wider margins; equal to 53x our ’21 estimate,” said John Hecht, equity analyst at Jefferies.

Upside and Downside Risks

Faster eCommerce (ex-Amazon) growth; Greater usage in existing markets and greater adoption in new markets; Faster margin expansion; Accretive acquisitions; Traction in Venmo monetization/new partnerships, Morgan Stanley highlighted as upside risks to PayPal.

A slowdown of eCommerce growth (ex-Amazon); Underperformance at eBay or faster conversion of volumes to eBay’s managed platform; Other market players with leads in offline could gain traction online, Morgan Stanley highlighted as downside risks.

PayPal Makes First Ever Blockchain Investment

PayPal was part of an extension to a series A funding round in Cambridge Blockchain, an identity and data management platform that keeps sensitive data secure and private for large institutions using shared ledger technology.

The specific amounts invested by PayPal were not disclosed by any part, but SEC filings indicate that Cambridge Blockchain raised a total of $3.5 million from several investors over the course of nine months. Note that PayPal invested as part of an extension stage to a series A round, whereas the main series A round raises $7 million. The total then would be $10.5 million.

Another notable investor in Cambridge Blockchain is HCM Capital, VC arm of Foxconn, the manufacturer for Apple’s iPhones.

A PayPal spokesperson emailed Coindesk about the investment saying:
“We made an investment in Cambridge Blockchain because it is applying blockchain for digital identity in a way that we believe could benefit financial services companies including PayPal. Our investment will allow us to explore potential collaborations to leverage blockchain technology.”

Unlike platforms such as BitPay, Square, or other point of sale services, Cambridge Blockchain does not compete with PayPal’s business efforts. Partially why this seemed to be an excellent first investment in the blockchain sphere for PayPal. PayPal can have a direct use for Cambridge Blockchain’s business efforts. They indeed hold sensitive user information, and the more secure options they have for handling user data, the better.

To get more detailed about Cambridge Blochain’s mission – it is to store, share, and validate data using blockchain technology. Their systems can run on public or private ledgers. They are working to improve the processes around user onboarding of personal data which included KYC processes, vetting of financial bank accounts, and other counterparties.

Some clients can be institutions who hold lots of sensitive personal information and companies with non-personal, but still sensitive data. They currently have 15 full-time employees and is part of the Decentralized Identity Foundation, a foundation effort which includes top companies such as the Enterprise Ethereum Alliance, IBM Blockchain, Hyperledgers, and others.

The industry is ultimately enthused to see PayPal make investments in the space. If they truly understand the power of blockchain, then it would only be wise for them to get involved. Until this point, cryptocurrency enthusiasts have been against PayPal and what they represent, but maybe their image can change now.

Speaking of PayPal, ex-cofounder Elon Musk recently made some waves on Twitter with crypto-related tweets. On April 2, 2019, he made his Twitter bio the CEO of Dogecoin, along with a string of tweets about how Dogecoin is the best cryptocurrency. You can still his tweets if you go to his feed. The real Dogecoin creator is Jackson Palmer, but we did not see any comment by him on the matter.