What Analysts Have To Say About Apple Inc. (AAPL) and Paypal Holdings Inc (PYPL)

By Jonathan Kalin 

Analysts explain why they are bullish on tech giant Apple Inc. AAPL and payment processing leader PayPal Holdings Inc PYPL in light of upcoming earnings and the market response to a competitor's improved product, respectively. One analyst expects Apple to increase its capital allocation program in its next earnings call, maximizing shareholder returns through buybacks and increased dividends. Meanwhile, another analyst quells investor concern regarding the effect that updates on competitor product Apple Pay will have on PayPal's stock. Let's take a closer look.

Apple Inc.

Analyst Amit Daryanani of RBC weighs in on Apple ahead of its Q2:16 April earnings call. The analyst specifically points to the company's capital allocation program and believes it can afford to increase dividends and its share buyback program in anticipation of a strong FCF figure next month. Specifically, he believes that Apple could increase its capital allocation program to $50B in addition to buybacks and increase its dividends by 10-15%. Pending Apple's capital allocation program, Daryanani believes an increase in buyback authorization by $40-$50 billion ($30 leftover in current plan) versus last year's buybacks ($35B) could enable Apple to drive a ~4% EPS growth in FY16 and beyond. Further, with the potential of earning $65 billion +FCF, Apple could "commit to returning 100% of annual FCF to shareholders over time."

Based on recent cash flow generation ($24 billion FQ1) and projected cash ($69 billion FY16E), Daryanani estimates this equates to 78% of FCF returned to shareholders vs 2015's 67% return. Of the FCF generated, he estimates 41% of the FCF will be generated in the U.S. while the remaining 59% will be generated overseas. Apple currently has $216 billion of net cash on hand, only 7% of which is onshore in the United States.

Apple stock currently has a 2% yield with a payout ratio of 17%. Daryanani believes the company could increase this number by 10%, implying an higher dividend payment of $2.29 per share (2.2% yield). Apple has increased its dividend every year in the past three years with an average increase of 11%. Total dividend payout is ~12.0B, however with 41% of $69B FCF generated in the US, Daryanani thinks the company could "[comfortably] raise these targets."

In light of these developments, Daryanani reiterated an Outperform rating on Apple on March 27 and provided a price target of $130, representing a 25% upside from its current price.

According to TipRanks, which measures analysts' and bloggers' success rate based on how their calls perform, analyst Amit Daryanani has an annual average return of 1.4% and a 53% success rate.

PayPal Holdings Inc

PayPal shares took a hit last week after Re/code, a tech website, reported that Apple Pay would be available to users via the Safari web browsing app on devices with Apple's TouchID fingerprint technology. Investors feared that the new integration would threaten PayPal's trajectory growth and its 65% market share. Reactions to new Apple Pay integration however, appear to be "overblown," according to BTIG analyst Mark Palmer, as Apple Pay has yet to slow PayPal's growth trajectory. Palmer believes these fears were "unwarranted" as Apple's operating system has a global share of just under 14% in 2015, which could be a "limiting factor on a global basis," while PayPal operates in over 200 countries and generated more than 50% of its net revenues from merchants and consumers outside the U.S. in 2015.

So far, Apple Pay has not had a significant impact on PayPal's revenues as the company added $15 billion to its quarterly run rate total payment volume (TPV) since Apple Pay was introduced in 2014. Further, PayPal has faced countless threats over the years including Google Checkout (2006), Amazon Payments (2007), and Apple Pay (2014) to name a few. These offerings have not diminished PayPal's growth trajectory, recently demonstrated by the company's 29% FX-neutral increase in TPV during 4Q15, which represents faster growth than the overall growth of e-commerce to $82 billion.

Further, according to Palmer, PayPal management defends against the premise that Apple Pay is a threat by pointing to the success of Braintree's platform. Braintree facilitates payments made with Apple Pay as well as other apps such as Android Pay and Google Pay.

Palmer reiterated a Buy on PayPal yesterday with a price target of $48.

According to TipRanks, which measures analysts' and bloggers' success rate based on how their calls perform, analyst Mark Palmer has a yearly average loss of 11.8% and a 36% success rate.