Baird Says PayPal's Solid Q2 Results, Guidance Overshadowed By Visa Deal

The Visa Deal

PayPal reported second-quarter revenue of $2.65 billion. The consensus estimate called for revenue of $2.60 billion. Adjusted EPS of $0.36 were in line with the Street's consensus. The transaction take rate of 2.69 percent declined from 2.91 percent in the same period last year. Transaction margin of 59.8 percent was slightly below consensus of 60.3 percent.

Baird said the although the deal with Visa removes an overhang, it creates margin pressure.

Related Link: Digging Into PayPal's Q2 Earnings

"Although this removes an ongoing investor concern, we note there is a risk to margins and profitability with higher credit funding mix without meaningful incremental volume," analyst Colin Sebastian wrote in a note.

That said, Sebastian is of the view that the Visa deal would benefit PayPal in the long run, given the potential combination of increased transaction volume, possibly more favorable Visa card economics and cross-selling opportunities.

Estimates, Expectations And Justifications

PayPal revised FY16 revenue and EPS guidance midpoint higher to $10.75 billion–$10.85 billion and $1.47–$1.50. The analyst also raised his FY16/17 revenue estimates to $10.8 billion/$12.7 billion from $10.6 billion/$12.3 billion, respectively.

Sebastian maintains his Outperform rating and $48 price target on the stock, which was seen down 7.31 percent to $37.19 at time of writing.