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What Are Bernstein's Top 3 Open Questions To PayPal?

What Are Bernstein's Top 3 Open Questions To PayPal?

Paypal Holdings Inc (NASDAQ: PYPL) held its first Investor Day after spinning off from eBay Inc (NASDAQ: EBAY), focusing mainly on product strategy and its efforts to make the company a broad, agnostic payments platform.

For the medium-term, the company still sees FX-adj. TPV (total payment volume) growth in the mid-20 percent range, FX-adj. revenue growth in the 15 percent range and "stable to growing" non-GAAP operating income margin, adding that there is an opportunity to double TPV over the next four years.

Related link: One Major Question PayPal Investors Aren't Asking

"In our view, the emphasis on PayPal's strategy was probably the right choice for the company's first investor day, to level-set the market on where PayPal is headed and what assets and capabilities it has at its disposal to get there," Bernstein analyst Lisa Ellis wrote.

"We came away from the day feeling better about both of those (admittedly hard not to, at an Investor Day)," Ellis added.

However, the analyst said she would have liked to see more of a roadmap to success for PayPal's strategy.

"We weren't expecting incremental financial guidance, but where we did feel like PayPal's investor day was a bit light on linking the company's strategy back to the core drivers of PayPal's earnings growth and profitability," Ellis elaborated.

Questions Remain

Following are Bernstein's top three still-open questions:

  • 1. "How is PayPal driving merchant and customer acquisition in the very lucrative ex-U.S., cross-border rich regions, which drive a disproportionate amount of PayPal's profit (we estimate nearly 50% over the next three years)?"
  • 2. "Does PayPal see a path to improving the profitability of Braintree (we estimate ~25 percent GP vs. ~58 percent for PayPal overall), and if so what are the steps along that path?"
  • 3. "What are the top 3–4 barriers to stronger revenue-generating usage/user (which remains stubbornly weak, appears to be growing only ~6 percent once you strip out the impacts of Braintree and P2P) and how is PayPal addressing them?"

The analyst noted that PayPal's margins will be pressured over time as the non-transaction-based portion of expenses drops versus revenues. This could happen when PayPal diversifies into "larger merchants, broader payments services (e.g., Braintree and Venmo) and drives up transactions/user, causing declining take rates (-16 bps/yr), thereby flattening transaction expenses (at ~93 bps/yr)."

Related Link: What Are Stifle's Takeaways From PayPal's Analyst Day?

However, Ellis views PayPal as a solid payments company benefiting from strong secular growth in online purchasing and huge lead over competitors.

Ellis, who has a Market-Perform rating on the stock, expects PayPal to deliver 13 percent non-GAAP EPS growth, 16 percent revenue growth and TPV growth at a 24 percent CAGR through 2020.

She recommends investors look for "attractive entry points when the stock pulls back on competitive fears (e.g., Apple Pay in browser)."

At the time of writing, shares of PayPal were down 4.10 percent to $37.38. The analyst has a price target of $43 on the stock.

Latest Ratings for EBAY

Jan 2020DowngradesEqual-WeightUnderweight
Jan 2020DowngradesHoldUnderperform
Dec 2019MaintainsMarket Perform

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