Can PayPal Q4 2015 Earnings Halt The Rapid Sell-Off In Its Stock?

  • PayPal will report its Q4 2015 earnings next week (January 27).
  • Investors did not see the growth they expected, and the stock has declined since the spin-off.
  • Core transaction business growth, mobile progress, new financial services, and 2016 guidance will be in focus.

Electronic payments giant Paypal Holdings (NASDAQ:PYPL) is expected to report its Q4 2015 earnings next week (January 27) amidst the continuous decline in its stock price. For years, PayPal was the crown jewel investors were trying to get access to through investing in its parent company, the e-commerce giant eBay (NASDAQ:EBAY). The broad belief on Wall Street (that also directed the

The broad belief on Wall Street (that also directed the spin-off from eBay) was that once PayPal was a standalone company, it could unlock its high potential, monetize its leadership position in a growing market, and produce an extraordinary return for its shareholders. However, since PayPal spun off from eBay, the company’s stock yielded a negative return of 12% that raised concerns about whether PayPal could stand up to the expectations.

The chart below can shed some light on the drivers behind the high expectations from PayPal. In the recent six years, the market witnessed PayPal consistently increasing its revenue each year in an impressive CAGR of 22%, taking advantage of its leadership position, increased demand for secure online transactions, and acquisitions.

PYPL_chart 8_011916

In recent years, the electronic payments market has become more and more crowded, with many new players entering to gain a piece of the pie. Apple (NASDAQ:AAPL), Alphabet Inc-C (NASDAQ:GOOG), Samsung Electronics (OTC:SSNLF), JP Morgan Chase (NYSE:JPM), Walmart (NYSE:WMT), Visa (NYSE:V), Mastercard (NYSE:MA) and many more have penetrated the market and put pressure on PayPal’s leadership position and market share. While newcomers like Apple Pay, Android Pay, and Samsung Pay try to expand globally, PayPal—who did that a few years back—is working to strengthen its worldwide positioning through acquisitions like Braintree and Xoom, offering new financial products and embracing Bitcoin.

Investors expected that without eBay around its shoulder, PayPal will be able to achieve meaningful partnership agreements with leading e-commerce platforms like Amazon (NASDAQ:AMZN) and Alibaba (NYSE:BABA), increase market share in China, and offer more added value to online financial services. The high level of expectations drove the 5% plunge after the release of Q3 2015 earnings. Last quarter, PayPal beat analysts’ expectations for EPS and slightly missed on the consensus revenue forecast.

However, the biggest disappointment was PayPal’s annual revenues guidance that reflected only a 16.5% YoY top-line growth. To investors, it indicated that PayPal is not only not unlocking its potential but also falling behind in the market. Since its Q3 2015 earnings release, PayPal stock price has fallen by 14%, while the mean price target remained pretty much solid, at around $41, as shown in the chart below.

PYPL_chart 9_011916

As we approach PayPal’s Q4 2015 earnings release, the company’s growth in light of intensifying competition will be in focus. Historically, the fourth quarter has had the highest revenue of the year thanks to the holiday season and various special shopping days. Analysts expect that PayPal will increase its revenues by 15% QoQ to present a record high quarterly revenue of $2.9B, which reflects an annual growth rate of 16.5%. I believe the current PayPal stock price already reflects the market's disappointment over PayPal's annual growth rate decline. However, additional disappointment with earnings could send the stock price much lower.

Beyond the total revenues performance, investors are looking at PayPal’s transaction margin, mobile progress, and added-value services. In the previous earnings release, PayPal’s transaction margin shrank by 1 percentage point YoY, to 62.3%, and concerned investors wondered whether it was an indication of narrowing profitability.

In Q3, PayPal reported that mobile accounted for 30% of its total transactions and that mobile transaction business grew by 38% YoY. Investors will look to see how the mobile business evolves in the face of new competitors. PayPal announced before that it passed the $1B milestone for working capital loans – investors are looking to see more initiatives like this and more information about PayPal’s smaller revenues streams.

These are the comparable figures to watch in this earnings:

Q4 2015 Consensus Q4 2014 Actual 2015 Consensus 2014 Actual
Revenue $2.51B $2.19B $9.20B $7.95B
EPS N/A $0.34 $0.94 $0.31

Conclusion

PayPal will report its Q4 2015 earnings next week (January 27) amidst the recent sell-off in its stock, and investors are concerned whether PayPal can unlock its potential as an independent company. PayPal disappointed investors with its annual revenues guidance that reflected a decline in the company’s growth rate YoY.

Investors are focusing on three main things: core transaction business growth, mobile progress, and added value financial services. Following investors’ high expectations of PayPal, 2016 guidance will be in focus and PayPal potential growth next year will impact the stock performance in the upcoming weeks. As investors were already disappointed in the previous earnings, another disappointment could trigger a sharp decline in PayPal stock price.

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