It’s safe to say investors were not too keen on PayPal’s (NASDAQ:PYPL) latest set of quarterly results, sending shares down over consecutive sessions last week once the company dialed in its Q2 report. While the digital payments leader met Street expectations on the headline metrics, investors chose to focus on other, less pleasing developments.
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But let’s start with the positives. PayPal delivered revenue of $7.3 billion, for a 7.4% year-over-year increase and edging ahead of the consensus estimate by $30 million. Adj. EPS of $1.16 was in-line with the analysts’ forecast. Total payment volume (TPV) rose by 11% from the same period a year ago to $377 billion. And for the outlook, PayPal expects Q3 adj. EPS between $1.22-$1.24. Wall Street was looking for $1.22.
So far, pretty decent. However, the problems lie in other details. The company saw out the quarter with 431 million accounts, falling from Q1’s 433 million and representing its second consecutive sequential drop. Net cash provided by operations turned negative, hitting -$0.2 billion, a decline from $1.17 billion in the first quarter and from $1.3 billion in the same period a year ago. Likewise, free cash flow of -$0.4 billion dropped from Q1’s $1.00 billion.
Morgan Stanley analyst James Faucette admits that for many investors, PayPal remain a “show me story.” “We expect most investors will want to see evidence of improving transaction margin profits before fully valuing PYPL,” Faucette said. “In fact, we believe that many remain skeptical of the imminent improvements highlighted by management.”
Not Faucette, though. Despite these issues, the analyst believes that his “proprietary work” on PYPL largely supports a “positive outlook.” In fact, Faucette’s rating on PYPL stays an Overweight (i.e. Buy) while his $126 price target remains the Street’s highest. It also suggests the shares will almost double in value over the next year. (To watch Faucette’s track record, click here)
Looking at the consensus breakdown, 19 other analysts have also recently posted positive PYPL reviews and with the addition of 13 Holds, the stock claims a Moderate Buy consensus rating. Most think the shares are trading at a meaningful discount right now; the $87.03 average target implies one-year share appreciation of 35%. (See PayPal stock forecast)
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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.
