Why Paypal Holdings Inc (NASDAQ:PYPL) Will Hinge on Venmo and the Top Line

Paypal Holdings Inc (NASDAQ:PYPL) is getting ready to report its Q3 earnings tonight after the close with a conference call to follow at 5pm ET. Current S&P Capital IQ consensus stands at EPS of $0.54 on revenue of $3.66 bln. We will likely follow-up tomorrow if the results merit further discussion and analysis.

In front of the report, shares of the stock have been weak, sliding lower with the overall weakness we are seeing in the tech space and the broader market. The stock dropped under its 200-day simple moving average earlier this month, and failed to retest it before taking another beating again today. The key to turning it around is probably more down to the broad market, but investors will be focused on revenue growth over 20% and TPV growth of 25%+, as well as an improvement in the monetization of Venmo from the current 17% level.

Paypal Holdings Inc (NASDAQ:PYPL) has been relatively consistent on earnings with 2-3 cent beats on the bottom line and small 1-2% beats on revenues the past couple of quarters.

Revenue growth has accelerated to over 20% — which is promising – in each of the last four quarters with the past two registering 23% year over year growth.

The Q3 consensus expectations would mark a 13% return which would be the lowest since the company IPO’d back in late 2015. This would be an obvious disappointment as investor focus remains on the growth outlook. In other words, both because of the tone of the market context and because of where official expectations are set, an inline report today is likely to deliver some more pain for shareholders.


Why the Long Face?

That brings us to why we might be seeing some concerns around growth. To put it bluntly, the primary reason for the concern has to do with whether or not the company is going to be able to truly monetize Venmo (the digital wallet acquired by the company as part of Braintree in 2013).

At this point, the process is already lagging initial timeframe expectations.

In the quarter, Venmo continued its impressive growth by processing $14.2 billion in payment volume, an increase of 78% year-over-year. Venmo net new actives hit another all time record high in Q2. But only 17% of Venmo users are monetiozing the Venmo card so investors would like to see more interaction here.

So, long story short, expect Transaction Processing Volume (TPV) to be a key metric to watch.

TPV came in at +27% FX-adjusted (29% constant currency) last quarter which was slightly better than the expected 26%. FX headwinds will also be of interest as the company discussed a $80 mln headwind from FX when it provided its latest round of guidance. PYPL did raise its FY18 EPS outlook in its Q2 report citing strong market conditions. Investors would like to see this continue.


The Nitty Gritty

The forecast from the company for Q3 currently sits at $0.53-0.55 in EPS, with revs of $3.62-3.67 bln. That weaves into the FY18 of $2.32-2.35 in EPS, with full fiscal year revs of $15.3-15.5 bln.

The company also announced a new stock repurchase program with its Q2 earnings. PYPL may repurchase up to $10 billion in outstanding common stock. This program will become effective after completion of the company’s previously announced $5 billion stock repurchase program, of which $2.7 billion remained available as of June 30, 2018. That’s a pretty big buyback program, which definitely would seem to create a bit of safety net here.

Paypal Holdings Inc (NASDAQ:PYPL) generated sales of $3.9B, according to information released in the company’s most recent quarterly financial report. That adds up to a sequential quarter-over-quarter growth rate of 4.3% on the top line.

In addition, the company is battling some balance sheet hurdles, with cash levels struggling to keep up with current liabilities ($5B against $24.8B, respectively), which is to be expected at this stage. The growth is the key. As long as that’s there, the balance sheet isn’t really important.

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