PayPal (PYPL) reported its fiscal Q2 2022 earnings on Tuesday evening — and on Wednesday, the crowd went wild. On a good day for tech stocks, with the Nasdaq rising 2.6%, PayPal shares blew past the competition and closed the day up 9%. So what did investors like about PayPal’s Q2 report?
What wasn’t to like?
Sales grew 9% to $6.8 billion, edging out consensus sales targets. GAAP results showed a loss for the quarter ($0.29 per share). But pro forma profits were a strong $0.93 per share, ahead of analyst forecasts for $0.86. Free cash flow grew 22% year over year to $1.3 billion.
Commenting on the results, Morgan Stanley analyst James Faucette observed that “adjusted” operating profit margins came in higher than Wall Street had been expecting at 19.1%, helping PayPal to beat earnings for the quarter. Faucette seemed especially impressed by PayPal’s “demonstrably faster-than-eComm growth for PayPal-branded transactions” — albeit outgrowing the e-commerce industry wasn’t too tough a feat last quarter, given that “underlying ecommerce growth [for everyone else was roughly] flat.” He also noted that Venmo revenue grew more than 50% in the quarter, and that Braintree grew 44%.
Granted, in contrast to the fantastic Q2 results, PayPal’s forward guidance was a bit mixed. Management said revenues in Q3, for example, will come in below analyst predictions at $6.8 billion again, and adjusted earnings will miss Wall Street’s target by about $0.02 at $0.95 per share.
The good news is that by year end, PayPal sees adjusted earnings making up the difference — about $3.92 per share for the year, which would be ahead of analysts’ forecast $3.85. (When calculated according to GAAP, PayPal thinks earnings will be about $1.57 per share). The bad news is that PayPal is only looking for revenues to come in at about $27.8 billion this year, a bit below Wall Street’s hoped-for $28.2 billion.
Give credit to PayPal, however, for taking swift action to allay any investor disappointment at that revenue guidance. Concurrent with its earnings release, PayPal announced plans to spend $15 billion buying back its own stock.
On top of that, PayPal said it has plans in place to cut its operating costs by some $900 million through the end of this year. Faucette notes that when you combine these costs cuts with “additional initiatives,” and annualize the savings, this could save PayPal as much as $1.3 billion in costs in 2023.
And now here’s the really interesting part: Crunching the numbers, Faucette observes that $1.3 billion in cost savings have the potential to add as much as 470 basis points worth of operating profit margin to PayPal’s earnings. That’s a huge potential boost to profit. Granted, Faucette thinks the company’s continued investments in “focus areas of checkout, digital wallets, and Braintree will remain a priority,” preventing PayPal from reaping quite all of those savings. But the analyst still thinks PayPal will be able to boost its profit margins by at least 50 basis points even despite making the necessary investments.
This, says Faucette, implies that operating margins could rise as high as 20.4% by year end, delivering as much as $3.93 per share in adjusted profit this year — and justifying an “overweight” rating for PayPal stock, and a $134 price target. Investors stand to score a 37% gain, should Faucette’s thesis go according to plan in the year ahead. (To watch Faucette’s track record, click here)
Overall, PYPL holds a Moderate Buy rating from the analyst consensus view, based on 21 Buys and 8 Holds. The stock’s $119.29 average price target indicates room for about 23% upside from the current share price of $96.62. (See PYPL stock forecast on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.