The PayPal Buyback Surprised Citi Analysts; Firm Sees Stock Above $40

Citi issued a company note on PayPal Holdings Inc PYPL after the company reported strong fourth quarter results, particularly with regard to account growth and merchant acquisition. The firm rates PayPal as a Buy with a $41 price target.

Analysts Ashwin Shirvalkar and Donald Fandetti wrote, "PYPL indicated that the merchant conversion backlog is high and consumer engagement (via PayPal One Touch, more transactions per month, etc.) is increasing, implying the demand headed into 2016 should be solid...We would Buy PYPL as it begins to set up a track record of performance."

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Citi highlighted two takeaways that can drive PayPal higher in 2016.

1. Profitability

Analysts noted that PayPal benefited from heightened operational efficiency and cost cutting, which translated to margins that exceeded consensus expectations. The company reported EPS of $0.36, which beat estimates of $0.34 and Citi has modeled a further improvement of margins in 2016 due to continued demand for the company's payment platforms.

2. Stock Repurchase Program

In its latest earnings report, PayPal management announced a $2 billion stock repurchase program to return capital to investors. Citi wrote that this unexpected announcement highlighted the operational strength of PayPal and has the potential to drive share price appreciation.

Shares of PayPal recently traded at $33.99, up 7.5 percent.