Stock of the week: PayPal outperforms in Q2!

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PayPal (NASDAQ:PYPL) shares are up more than 30% in the last month. After posting the excellent Q2 results, this is in the spotlight as my stock this week. With that in mind, I think PayPal can recover in the current stock market recovery.

Investment paid off

After the fintech company reported its Q2 numbers, PayPal saw its stock rise more than 10%. This is because it beat a number of analysts’ forecasts on both the top and bottom lines. In fact, the company manages to surpass its own guidelines on most metrics!

Metric Q2 2022 Q2 2021 Change (yoy)
Income $6.81bn $6.24bn 9%
Non-GAAP earnings per share (EPS) $0.93 $1.15 -19%
Total payment volume (TPV) $339.8 billion $311.0bn 9%
Payment transactions per active account (PTPAA) 48.7 43.5 12%
Total payment transactions (TPT) 5.51 billion 4.74bn 16%
Total active accounts (TAA) 429m 403m 6%
Net new account (NNA) 0.4m 11.4m -96%
Data source: PayPal Q2 2022 earnings report

However, the company’s EPS experienced a substantial decline. However, this is due to the lower transaction margin of eBay, and last year’s figures got a boost from the release of unneeded allowances for bad loans. Taking these factors into account, EPS remained flat year-over-year (yoy).

Friends bring quality

Since PayPal revised its goal to deliver more quality than quantity, user growth appears to be declining, but PTPAA continues to increase. This is evident in the quarterly figures, with very small NNA, but strong PTPAA growth.

PayPal: Payment Transactions per Active Account
Data source: PayPal Q2 2022 earnings report

This growth can be attributed to two reasons. The first is the increase in core daily active users, which has seen an increase of more than 40% since 2019. This is especially important for PayPal because 80% of its transactions come from the 30% of its most active users. The second is the continued growth of Venmo, which ultimately drove more than 50% of PayPal’s revenue growth in Q2.

Metric (Venmo) Q2 2022 Q2 2021 Change (yoy)
Number of active accounts 90m 76m 18%
Total payment volume $61.4 billion $57.7 billion 6%
Data source: PayPal Q2 2022 earnings report

As such, management provides a decent outlook for the rest of the year. It NasdaqThe listed companies now expect Q3 revenue of $6.8 billion, with upwardly revised non-GAAP EPS of around $0.95. For the full year, he expects 10% revenue growth, with non-GAAP EPS around $3.92. The board also forecasts TPV growth of 12%, adding another 10 million accounts, and having free cash flow of at least $5 billion.

Long road to grow

So, is PayPal stock worth buying? Well, all signs seem to point to yes. Despite the excellent numbers and guidance provided, the cost-saving impact has yet to be realized. Interim CFO Gabrielle Rabinovitch said PayPal expects $900 million in cost savings in FY22, and an additional $1.3 billion next year. He also reiterated that payment processors expect an operating margin expansion of at least 0.5% from Q4. And with the core market yet to be fully penetrated, PayPal still has a long way to go as it expands its digital wallet features to more regions around the world.

PayPal: Consumer Penetration Core Market
Data source: PayPal Q2 2022 earnings report

Nonetheless, it should be noted that PayPal has $10.6 billion in debt. But with no maturities for the rest of the year and margin expansion on the horizon, I’m confident that incoming CFO Blake Jorgensen will be able to navigate his pile of debt without too much trouble.

Year Debt Repayment
2022 $0
2023 $418 million
2024 $1.25 billion
2025 $1.0bn
2026 $1.25 billion
Then $6.50bn
Data source: PayPal Q2 2022 form 10-q

Finally, the company sees its take rate remain flat at 2% (yoy), which is great news as PayPal continues to maintain its transaction margins while seeing TPV increase and grow its market share. Therefore, I think PayPal has a position in my portfolio with an average target price of $119.29.