Analysts are diving into the second quarter earnings report from PayPal Holdings PYPL and evaluating what a $2 billion stake from Elliott Management could mean for the financial technology company's future.
The PayPal Analysts: After PayPal said second-quarter revenue increased 9% year-over-year to $6.8 billion, which beat the estimate of $6.78 billion according to data from Benzinga Pro, these analysts chimed in:
- Bank of America analyst Jason Kupferberg has a Neutral rating and raises the price target from $87 to $94.
- Stephens analyst Charles Nabhan has an Equal-Weight ratting and a price target of $95.
- JMP Securities analyst David M. Scharf has a Market Outperform rating and raises the price target from $100 to $120.
- RBC Capital analyst Daniel R. Perlin has an Outperform rating and raises the price target from $92 to $118.
- Morgan Stanley analyst James Faucette has an Overweight rating and raises the price target from $129 to $134.
- Raymond James analyst John Davis has a Market Perform 3 rating and no price target.
- Needham analyst Mayank Tandon has a Hold rating and no price target.
- KeyBanc analyst Josh Beck has an Overweight rating and raises the price target from $100 to $115.
The Analyst Takeaways: Kupferberg remains neutral on PayPal with “big picture questions” remaining after the earnings report.
Related Link: Why PayPal Stock Is Rising Today
“Overall, while a second straight in-line-ish quarter is encouraging, in our view visibility on longer-term normalized earnings power remains limited and uncertainty lingers around PYPL’s strategic pivot favoring engagement over net new adds,” Kupferberg said.
Scharf highlights accelerating revenue growth each month and Venmo volume and active accounts up year-over-year. The analyst noted the company’s heavy mentions of cost-cutting measures and focusing spending on key areas.
“While management was not writing off future M&A opportunities, they painted a clear picture of a refocused business,” Scharf said.
Perlin also highlights the streamlining of products and expenses to help with margin expansion.
“PayPal rolled out a more focused playbook to narrow its product focus on Checkout, Digital Wallets, and Braintree, while also streamlining operating expenses, which combined should return the company to expanding operating margins in Q422 and FY23,” Perlin said.
Faucette highlights fast e-commerce growth for PayPal branded transactions and growth for Braintree.
“We are encouraged by what we think are the key business elements coming to the fore,” Faucette said.
The analyst calls the second quarter financial results “a step forward for recognizing growth.”
“We admit that a stabilization of underlying e-commerce growth is still likely required for meaningful outperformance.”
Davis points to the risk/reward for PayPal being balanced with shares up after reporting earnings.
“While the achievability of the 2022 top-line guide is still up for debate, investor focus should shift to 2023 estimate, which we believe may finally be in a good spot given the commentary around expense reductions and further repurchases,” Davis said.
Tandon highlights the share buyback and cost savings plans but said the large increase in the share price after earnings keeps the stock at a balanced risk-reward level.
“While these are positive steps to enhance shareholder value, the shares are expected to open at an ex-cash FY23 P/E multiple of 17.5x, which we believe presents a balanced risk-reward given the challenging economic environment and PYPL’s recent inconsistent execution,” Tandon said.
The analyst notes PayPal provided a “mixed outlook” for the third quarter.
“While we believe PYPL is taking prudent steps towards transforming the business by focusing on user engagement and more disciplined capital allocation, the business continues to be pressured in a tough economic environment that includes high inflations, supply chain constraints, and soft e-commerce volumes.”
Beck believes PayPal's focus on core assets, including Venmo and Braintree, could help the company going forward.
“The CEO highlighted an emphasis on bread and butter checkout with an emphasis on core PayPal, Venmo, and Braintree assets, reflecting a sharper focus that we think could help define PayPal’s third act following a successful spin from eBay,” Beck said.
Beck calls the risk from losing eBay EBAY business “overhyped” and sees the company moving beyond the previous relationship and could end up being net positive for the company.
“We see opportunity for PayPal to create value through an asset-light strategy.”
Elliot Investment: A $2 billion investment stake by activist investor Elliott Management was another big talking point in PayPal’s earnings report and for analysts breaking down the report.
PayPal entered into an information sharing agreement with Elliott and plans to explore value-creating opportunities with the investor.
“PYPL is planning an Analyst Day in 1Q23 to discuss its medium-term capital deployment strategy, which we suspect could include the introduction of a dividend, given the strength of PYPL’s FCF profile,” Kupferberg said.
Nabhan called the $2 billion stake by Elliott the key headline for the quarter, as it makes the activist the fifth largest shareholder in the company.
“We view the information sharing agreement with Elliott Management, with which it will review capital return alternatives and value creation strategies, as an additional focal point of the call,” Nabhan said.
PYPL Price Action: PayPal shares are up 10% to $98.96 on Wednesday.
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