valuentumbrian:
Image Source: PayPal 2Q presentation, page 10
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We continue to believe there is upside to the online payment processor’s share price. Interested in viewing our 16-page valuation report on PayPal? Please click here.
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By Brian Nelson, CFA
A quarterly “beat and raise” and a new agreement with Visa (V) weren’t good enough to drive shares of PayPal (PYPL)
higher July 22, but we’re not worried. Revenue growth of 19% on a
foreign-currency neutral basis and non-GAAP earnings per share growth of
11% wasn’t bad at all. Operating cash flow and free cash flow
generation of $696 million (up ~12% year-over-year) and $495 million (up
27% year-over-year) in the quarter wasn’t too shabby either. Through
the first six months of 2016, the company has generated $1.1 billion in
free cash flow, better than the $740 million mark generated during the
same period a year-ago. Active customer accounts advanced 11% in the
quarter, and the company processed an impressive 1.4 billion
transactions (up 25%) on $86 billion of volume (up 29% on an FX-neutral
basis). PayPal continues to gain share, growing much faster than the
broader pace of e-commerce expansion.
The
good news keeps coming. The e-commerce payments giant raised its
full-year 2016 revenue guidance, to the range of $10.75-$10.85 billion
(was $10.5-$10.7 billion), and we think ongoing momentum toward the back
half of the year may make such a revision conservative. Non-GAAP
diluted earnings per share for 2016 is targeted in the range of
$1.47-$1.50, tightening the previous range of $1.45-$1.50 issued in
April. PayPal may be trading at 25 times current-year non-GAAP earnings,
but in the context of consumer staples entities, for example, fetching
similar-sized multiples in this overheated equity market on mature or
slowing growth, PayPal is a relative bargain. PayPal holds a
solid net cash position, with cash equivalents and investments tallying
~$6.3 billion at the end of June 2016 (or ~14% of its market
capitalization).
The deal with Visa seems to have investors on edge, however:
“PayPal
and Visa announced a strategic partnership to expand their
long-standing relationship that will result in an improved and more
seamless shopping experience and greater choice in how consumers pay.
This agreement is a significant step towards offering greater customer
choice and flexibility for PayPal’s customers.
PayPal
will also gain access to Visa’s tokenization services, starting in the
United States, for in-store PayPal transactions. This will expand
acceptance for PayPal’s digital wallet to all physical retail locations
where Visa contactless transactions are enabled. The partnership’s
benefits will include greater accessibility and volumes for Visa payment
instruments in the PayPal digital wallet.
PayPal
also will ensure that data provided to issuers and their cardholders
for Visa-funded transactions will be consistent with the information
that each receives with a traditional Visa card transaction, providing
greater transparency and enhancing payment system security.
The
agreement affords PayPal certain economic incentives, including
incentives for increased Visa volume, and greater long-term certainty on
fees paid to Visa, and further removes the threat of any fees or Visa
network rules being targeted solely at PayPal.”
We’re
still sifting through the details, and while many are pointing to
margin pressures at PayPal due to pressure from the Visa agreement, we
expect growth potential from the deal to more than offset any profit
squeeze. More importantly, however, we think it is worth noting that
PayPal had been rumored to be talking with MasterCard (MA),
and the Visa announcement is a huge development for long-term holders.
The end game for PayPal may very well be a merger with one of these two
credit card processors. We’re keeping the position in PayPal in the Best
Ideas Newsletter for the foreseeable future. Our fair value estimate of
$50 for PayPal remains unchanged at this time.
View Valuentum’s Best Ideas Newsletter portfolio here (login required) >>
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