Is PayPal worth US$199 a share?

US payments platform PayPal Holdings (NAQDAQ: PYPL) is due to report its second quarter 2020 financial results at 14:00 PT on Wednesday 29 July.

Below, we highlight three key considerations that investors should pay attention to ahead of PayPal’s upcoming earnings report.

PayPal has been setting price records since May 2020

PayPal’s share price has surged as much as 98% since early April 2020, with investors flocking to the fintech stock as the Covid-19 pandemic worsened.

Technology and digital-centric stocks like PayPal have particularly benefitted from the pandemic, with these companies expected to increase their earnings and growth rates as more people are forced to stay home (under official measures) and use online services.

As a comparison, rival companies Visa Inc and Block Inc (founded by Twitter CEO Jack Dorsey) have seen their share prices skyrocket 45% and 188% respectively.

For PayPal, what has also been especially remarkable – similar to the aforementioned entities – is the fact that although shares first hit a historic high price of US$127 per share in May 2020, they continue to edge higher every passing week.

As of Monday 27 July 2020, PayPal is trading at US$179 per share. This represent a price-to-earnings ratio of 112.65, well above the stock’s five-year average of 50.13.

Throughout the month of July, the stock has been trading no less than a PE ratio of 107.47.

Analysts see more upsides for PayPal share price

Across the board, PayPal currently has received an average rating of ’buy’ from 44 brokers, based on Refinitiv data.

Barclays equity analysts last month rated the stock ‘overweight’, while raising price target to US$199 per share from US$169 previously. This represents an upside of 11% from the last traded price of US$179.

They had increased price estimates based on PayPal’s recent penetration into the physical point of sale (POS) space via its ‘Bits-and-Mortar’ transactions solutions.

As a result, the analysts predict that every 1% of physical US retail sales (~US$4.2 trillion annually) captured by PayPal would represent an estimated 8.3% stock price upside based on their FY2021 revenue and earnings per share (EPS) estimates.

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Additionally, they noted that Covid-19 has also accelerated existing POS trends that were already to PayPal’s advantage, stating that the pandemic has created ‘an urgency on the part of both merchants and consumers to alter historical payments models and behaviours’.

Downside scenarios include the stock falling to US$112 per share on lower consumer spending, and if new digital checkout offerings from competitors threaten a loss of market share.

Meanwhile, Keefe, Bruyette & Woods on 05 July 2020 rated PayPal ‘outperform’ with a price target of US$177.21.

PayPal’s earnings fell below estimates in Q1

Analysts polled by FactSet have given a consensus EPS estimate of US$0.87 per share alongside expected revenues of between US$4.8 billion and US$5.6 billion for the platform’s Q2.

PayPal itself is expecting revenue to grow at an estimated 15% year-on-year on a currency-neutral basis.

It also expects GAAP EPS to decline by 28%–34% and non-GAAP EPS to grow by 15%–20% year-on-year. At the upper end of PayPal’s non-GAAP EPS forecast, this would mean non-GAAP EPS will end up around US$0.935 per share, taking it above industry predictions.

Meanwhile, estimated non-GAAP amounts for the three months ending June 30, 2020, are also expected to reflect adjustments of approximately US$465–US$525 million, including estimated stock-based compensation expense and related payroll taxes in the range of US$310–US$330 million.

For existing shareholders, it is probably also worth noting that Q1 2020’s reported EPS of US$0.66 per share had fell below analysts’ projections by 12.33%. Reported sales at US$4.6 billion were also under expectations of US$4.7 billion.

On the other hand, Q4 2019’s EPS and total sales had surpassed Wall Street estimates.

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