Digging Into Paypal's Q2 Earnings

William Blair maintained its Outperform rating on Paypal Holdings Inc PYPL following an in-line EPS and revenue beat for the second quarter. However, the brokerage noted that though the deal with Visa Inc V removes overhang, it reduces visibility into 2017.

PayPal reported second-quarter revenue of $2.65 billion, representing growth of 15.4 percent (19 percent constant-currency). The consensus estimate called for revenue of $2.60 billion. Adjusted EPS of $0.36 were in line with estimates.

Meanwhile, payment volume growth came in at 28 percent. The gap between growth in payment volume and revenue was attributed to the faster growth of lower-yield Braintree and Venmo and more volume from larger merchants.

PayPal added 4 million new users in the June quarter to 188 million users/merchants (11 percent year-over-year growth). Transactions per active account hit a record of 29.4 on an annualized basis, up from 26.1 a year ago, but well below management's target of 2-4 transactions per week.

On the Visa deal, the brokerage noted that it reduces visibility due to a potential modest mix shift to more low margin credit card transactions.

On a positive note, apart from preventing steering to ACH transactions, the deal will give PayPal easier acceptance at the point of sale through access to the Visa Digital Enablement Program (VDEP).

The catch here is that the deal only covers the United States, while about half of PayPal transactions are international. As a result, William Blair is "quite certain" that PayPal has to strike similar deals with Outperform-rated American Express Company AXP, Discover Financial Services DFS and Mastercard Inc MA.

For the December quarter, the company anticipates 16-18 percent revenue growth to $2.62 billion to $2.67 billion and adjusted EPS of $0.33 - $0.35.

The brokerage maintained its EPS estimates at $1.50 for 2016, $1.76 for 2017, and $2.06 for 2018.

"While there may be some temporary queasiness from investors until guidance for 2017 is given, we believe the long-term growth opportunities remain substantial and that the company continues to execute well on numerous growth opportunities," analyst Robert Napoli wrote in a note.

At time of writing, shares of PayPal fell 7.5 percent to $37.12.

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