Key Takeaways And Positives From PayPal's Q4 Report

Deutsche Bank’s Bryan Keane expects Paypal Holdings Inc (NASDAQ: PYPL’s margins to expand in FY 2017 after a better-than-expected take rate drove an in-line EPS for the company.

Despite the impact from increased transaction expenses, PayPal now expects flat to slightly expanding margins in FY 2017 (up from consistent margins), driven by significant cost control initiatives.

PayPal also raised FY 2017 revenue growth guidance to 17–19 percent from 16–17 percent on improved confidence from accelerating secular tailwinds. The company, which is discussing partnerships with various merchants such as Amazon.com, Inc. AMZN, sees FY 2017 EPS of $1.69–$1.74.

Positives

Following are the positives from PayPal’s Q4 report:

• PayPal added 5 million active accounts and transactions/account grew 13 percent, indicating increased engagement.
• Opex growth slowed to 7 percent, offsetting transaction margin decline.
• Take rate of 3 percent topped consensus estimate of 2.95 percent. Keane expects take rate to benefit overtime from Venmo monetization and pricing optimization.
• PayPal expects $500 million in FY 2017 buyback.
• Strong free cash flow of $771 million. The company has $6.5 billion in cash outside the United States, which could be re-deployed for share repurchases or strategic acquisition.

Negatives

Among the negatives, TPV of $99.3 billion was below consensus estimate of $101.3 billion. Also, charge-off increased to 7 percent in the fourth quarter from 6 percent in the third quarter due to seasonality and a slowdown in credit TPV.

Ratings And Expectations

Keane, who reiterated his Buy rating on the stock, raised his FY 2017 EPS by $0.02 to $1.71 while maintaining his FY 2018 EPS view of $2.03.

At last check, shares of PayPal fell 3.04 percent to $40.24. Keane has a price target of $52.