'PayPal's Business Really Took Off,' Analysts React To Q1 Earnings

PayPal Holdings Inc. PYPL shares surged 14.5% higher on Thursday as the company's first-quarter earnings report suggested it is set to grow during and after the novel coronavirus (COVID-19) pandemic.

The company reported an adjusted earnings per share of 66 cents, 12% below the average analyst estimate of 75 cents.

It posted a total revenue of $4.6 billion, missing the Wall Street estimate of $4.74 billion by nearly 3%.

Regulatory Framework Change Caused Low EPS

RBC Capital Markets Analysts noted that the first-quarter adjusted EPS missed the expectations due to the new Current Expected Credit Loss (CECL) accounting standards mandates. Absent the regulatory change, PayPal would have posted an EPS of 83 cents, up 9% from what the analysts had estimated.

"The change was a result of the deteriorating economic factors and the company feels the current level is conservative," Rosenblatt Securities analyst said. "This will be an area to watch going forward as unemployment has continued to worsen but stimulus checks have improved payment trends, highlighting there are a variety of factors the company will have some leeway in assessing.

According to Wells Fargo Securities analysts, a similar CECL loss is "unlikely to occur to the same degree" in the coming quarters.

'April Really Took Off'

The payments company suggested an estimated revenue growth of 20% in April, something that analysts see as a sign of the company's ability to take advantage of the digital business boom caused by COVID-19.

"As consumers settled into modified behaviors after implementation of social distancing measures, [which] started in the US and Western Europe in March, PayPal's business really took off," Morgan Stanley analysts said in a note.

Net new account activations soared to 7.4 million in April, almost twice than the numbers in March, and compared with 10 million organic net new account activations in the entire first-quarter, the analysts noted.

PayPal also estimated a total portfolio value growth of 22% in April, which Morgan Stanley analysts found impressive, given that they had estimated a travel-related drag between 6% and 8% for the company. The payments company further reported May 1 to be its biggest transaction day ever.

"For us the better subscriber growth trajectory combined with higher initial engagement should translate into better compounding growth," they said.

Things Look Good Beyond Pandemic Effect

Analysts noted that PayPal's growth trajectory looks good beyond the surge caused by the pandemic.

"The market increasingly looks to PYPL as one of the clear secular winners on the other side of the current crisis with the anticipation of higher earnings power warranting higher valuations," Wells Fargo analysts said.

Morgan Stanley analysts noted the company's numbers from Austria and Germany, two countries among the first to ease coronavirus-related lockdowns, suggest that PayPal's usage didn't see any change even as social distancing measures were relaxed.

The company's usage is still running at two to three times of pre-coronavirus level, the analysts said.

PYPL Ratings, Price Targets

Wells Fargo has an overweight rating and raised its price target from $120 to $150.

Rosenblatt has a buy rating and increased its price target from $117 to $145.

RBC Capital Markets has an outperform rating and increased its price target from $120 to $142.

Morgan Stanley has an overweight rating and a price target of $131.

PYPL Price Action

Paypal closed 14% higher at $146.29 on Thursday and added another 0.5% in the after-hours session.

Photo by Kon Karampelas on Unsplash