More Upside for PYPL Stock?
PayPal Holdings Inc (NASDAQ:PYPL) will report second-quarter 2016 earnings on July 25 and if the number comes in above consensus estimates, it could drive the stock price to new highs. For investors looking at a short-term pop, this may be an ideal opportunity to own PYPL stock. Before we go into the factors that could lead to an earnings surprise, let’s take a closer look at PayPal’s current fundamentals and long-term prospects.
When PayPal was split out from eBay Inc (NASDAQ:EBAY) on July 20, 2015, it left the parent company with approximately $6.0 billion in cash and a guarantee that it would have a steady income stream from the online auction giant for the next five years. As of the end of March, PayPal still had nearly $4.8 billion in cash and equivalents on its balance sheet and four more years to run on that agreement. Fundamentally, PayPal is a mature, solid enterprise having grown revenue and earnings every year since 2014 and every quarter since trading as an independent public company.
According to WWD, PayPal is accepted as a payment method by eight of the top 10 e-commerce retailers in the United States. (Source: “Amazon, Wal-Mart Lead Top 25 E-commerce Retail List, WWD, March 7, 2016.) The two notable exceptions are Amazon.com, Inc. (NASDAQ:AMZN) and Staples, Inc. (NASDAQ:SPLS). Now that PayPal is independent of eBay, opportunities with Amazon and Staples are a lot more likely, adding to the appeal of PayPal stock right now. PayPal’s independence also creates opportunities internationally, as witnessed by its extended partnership with Alibaba Group Holding Ltd (NYSE:BABA).
PayPal’s global growth opportunities are further enhanced by the recent acquisition of Xoom, a payments provider that reportedly “will help accelerate PayPal’s entrance into the international remittances market.” (Source: “PayPal Completes Acquisition of Xoom,” PayPal Investor Relations, November 15, 2015.)
What’s more, Xoom is part of PayPal’s overall strategic growth plan of expanding its mobile presence. “Venmo,” “One Touch,” and “PayPal Commerce” are each components contributing to PayPal’s plan to simplify and enhance the way consumers and merchants conduct business using mobile devices. (Source: “PayPal Reports Strong First Quarter Results,” PayPal Investor Relations, April 27, 2016.)
So, fundamentally, the long-term outlook appears very promising for PayPal and should reward those with investment horizons that extend beyond one year. But what’s going on now that there may be a near-term opportunity to trade the stock?
The first hint comes from PayPal’s April 27, 2016 earnings release in which the company notes that it has added a number of “powerful new merchants” to their platform, including Air France, Crate and Barrel, Fresh Direct, Panera Bread, Sephora, and Woolworths in Australia. (Source: Ibid.)
PayPal’s total payment volume is on a tear and is growing at a faster pace than overall e-commerce growth. This momentum isn’t likely to have changed in the three months since the end of March and offers the seed for an upside earnings surprise. Trends don’t change abruptly and e-commerce continues to grow rapidly, up more than 15% year-over-year in the first quarter. (Source: “Quarterly Retail E-Commerce Sales 1st Quarter 2016,” U.S. Department of Commerce, May 17, 2016.)
PayPal’s earnings-per-share (EPS) trend also suggests similar momentum. In each of the last three quarters, PayPal has surprised on the upside.
Quarterly Earnings Surprise History
|Fiscal Quarter End||Actual EPS||Consensus Forecast||% Surprise|
Data source: Zacks Investment Research
This momentum and these trends do not appear to have been lost on traders, as technically, PayPal stock looks poised for a near-term breakout.
Chart courtesy of www.StockCharts.com
In my opinion, the path of least resistance in the current market environment for a stock that surprises on the upside is more likely to be up than down. Given the long-term attractiveness of PayPal, I’d be inclined to be bullish on PYPL stock before the July 25 earnings announcement.