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.