PayPal (NASDAQ: PYPL) stock is up over 30% in the last month. After posting excellent Q2 results, it takes the spotlight as my stock of the week. With that in mind, I think PayPal could rebound in the current stock market recovery.

Investment pays off

After the fintech firm reported its Q2 numbers, PayPal saw its stock rise by more than 10%. This was because it beat a number of analysts’ estimates on both its top and bottom lines. In fact, the company managed to surpass its own guidance on the majority of metrics!

Nevertheless, the firm’s EPS saw a substantial decline. However, this was because of lower transaction margins from eBay, and the last year’s numbers getting a boost from the release of unneeded allowances for bad loans. Taking those factors into consideration, EPS stayed flat on a year-over-year (Y/Y) basis.

Pals bring quality

Since PayPal revised its goal of bringing more quality than quantity, it’s seen user growth decline, but PTPAA has gone up steadily. This was evident in this quarter’s numbers, with minuscule NNA, but robust PTPAA growth.

The growth can be attributed to two reasons. The first is the rise in core daily active users, which has seen a rise of more than 40% since 2019. This is crucial for PayPal because 80% of its transactions come from 30% of its most active users. The second is the continued growth of Venmo, which ended up driving more than 50% of PayPal’s revenue growth in Q2.

As such, management provided a decent outlook for the rest of the year. The Nasdaq-listed firm now expects Q3 revenue of $6.8bn, with an upwardly revised non-GAAP EPS of approximately $0.95. For the full year, it expects 10% revenue growth, with a non-GAAP EPS of approximately $3.92. The board also forecasts to grow TPV by 12%, add 10m more accounts, and have a free cash flow of at least $5bn.

Long way to grow

So, is PayPal stock worth a buy? Well, all signs seem to point towards yes. Aside from the excellent numbers and guidance provided, the impact on its cost savings are yet to be realised. Interim CFO Gabrielle Rabinovitch mentioned that PayPal expects $900m worth of cost savings in FY22, and a further $1.3bn next year. She also reiterated that the payments processor expects operating margin expansion of at least 0.5% starting in Q4. And with core markets yet to be fully penetrated, PayPal still has a long way to grow as it expands its digital wallet features to more regions worldwide.

Nonetheless, it’s worth noting that PayPal sits on $10.6bn worth of debt. But with no maturities for the rest of the year and margin expansions on the horizon, I’ve no doubt that incoming CFO Blake Jorgensen will be able to navigate through its debt pile without too much hassle.

Finally, the company saw its take rate remain flat at 2% (yoy), which is great news as PayPal continues to maintain its transactional margins while seeing TPV increase and growing its market share. Therefore, I think PayPal has a position on my portfolio with an average price target of $119.29.

The post Stock of the week: PayPal outperforms in Q2! appeared first on The Twelfth Magpie.

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John Choong owns shares of PayPal. The Motley Fool UK has recommended PayPal Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The Fed is no Pal

Just like PayPal stock, US retail sales figures have been steadily declining since February. In fact, retail sales came in at -0.3% in May, on a month-on-month basis. This is an indication that consumer spending is decreasing as a result of higher interest rates.

The US Federal Reserve is committed to increasing interest rates until inflation retreats back down to 2%. Consequently, several analysts are pencilling the odds of a recession at 50%. If this were to happen, I expect the suffering for PayPal shareholders to get worse.

With less money flowing throughout the US economy, the platform stands to earn less from payments and transfers. This is because higher interest rates means higher borrowing costs, limiting the flow of cash around the economy.

More than just PayPal

Nonetheless, PayPal has a couple of interesting developments that could make it a fortune in the long term, as the fintech group has several brands to it. These businesses are seeing encouraging growth and progress. The list includes PayPal itself, Venmo, Braintree, Paidy, Xoom, Honey, iZettle, and Hyperwallet. I’m extremely upbeat about the group’s future prospects beyond its main business. But in particular, I have my attention focused on Venmo’s prospects as an American mobile payment service.

The company has lined up partnerships with Amazon and Doordash. These big firms are expected to integrate Venmo into their payment options later this year. If successful, I envision these collaborations to bring a flood of cash to the top line for PayPal.

Quantity over quality

Having said that, it’s worth noting that the core business still remains susceptible to harsh economic headwinds. Analysts have revised the stock’s average earnings per share down from $1.24 to $0.97 for the year.

Not to mention, its Venmo partnerships are yet to come into effect. For one, management has been silent on when the Amazon partnership will take place. Secondly, Doordash is yet to agree to business terms and conditions.

However, what concerns me most is its profit margins, which have been on a decline over the last four quarters. PayPal has to compete with the likes of Wise and Western Union, having lost market share over the years. Its current take rate is 2%, which is higher than Wise’s. Therefore, for it to continue being competitive, it’ll have to cut down its margins in order to retain/grow its transaction and customer volumes.

Thinning profit margins (Despite increasing volume) shows that PayPal is losing its pricing power and market dominance. As such, I won’t be buying more PayPal stock for now. Instead, I’ll be holding onto my shares in hopes that the Amazon partnership bears fruit.

The post Should I buy PayPal stock in July? appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

John Choong owns shares of PayPal at the time of writing. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Amazon and PayPal Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More pals

PayPal managed to surpass expectations with a growth rate of 8% year on year (Y/Y), as revenue came in at $6.5bn. Its earnings per share (EPS) was also in line with consensus, at $0.88 on a non-GAAP basis. Additionally, total payment volume (TPV) was up 15% Y/Y. The number of transactions per account was also up 11% on annual basis. Moreover, the fintech company added 2.4m net new active customers. PayPal’s Venmo business also saw a 12% increase Y/Y in TPV. These are all good signs.

A price to pay

While the figures for Q1 were great, the numbers behind the curtain make me worry as an investor. PayPal saw a 32% decline in free cash flow as the company incurred a -$0.20 EPS loss from lower transaction margin dollars from eBay. This was made worse by a loss from taxation (-$0.07 EPS) and credit losses (-$0.06 EPS). As for the elephant in the room, Russia, the loss of revenue from the region created a -$0.03 EPS loss from the suspension of transactional services.

To make matters worse, PayPal’s assets decreased as liabilities went up. Although the firm’s balance sheet is still in a rather healthy state, it could take a wrong turn if finances are not managed efficiently. The imminent departure of CFO John Rainey may not help.

More importantly, PayPal saw its take rate continue to decline along with its transaction margin losing 5%. Take rate is the percentage PayPal takes from each transaction as a form of commission, and is its main stream of income. With competition rising from other fintech companies such as Block and Wise, PayPal has been forced to lower its take rate to stay relevant. Although the discounted take rate has encouraged transaction volume, it’s only a matter of time before it starts impacting profit margins further.

Blue chip

On the brighter side of things, there are a couple of expansions that should help PayPal’s traffic. The introduction of PayPal Later in Japan and Germany, as well as Savings to PayPal Wallet in the US should bring some much needed momentum to PayPal’s growth. Nevertheless, 8% earnings growth isn’t ideal for a supposed growth stock.

So, is the PayPal growth story over then? It could be. The biggest fintech company in the world continues to lose market share to its peers. Venmo, seems to be the firm’s only growth prospect, but a TPV growth rate of 12% isn’t going to boost the PayPal share price to its highs of $300 anytime soon. Not to mention, the firm refuses to disclose the proportion of income it generates from its respective businesses in greater detail, which leaves me concerned as a shareholder, as this usually means that revenue isn’t meaningful enough. As such, I will be holding to see what comes of the Amazon partnership later this year.

The post PayPal earnings matches Q1 estimates. What now? appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

John Choong owns shares of PayPal at the time of writing. The Motley Fool UK has recommended PayPal Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.