PayPal Q2 Earnings Show Headwinds, but Results Hold Up Well

PayPal Stock at a Glance

• Current Morningstar Fair Value Estimate: $135
• PayPal Stock Star Rating: 4 Stars
• Economic Moat Rating: Narrow
• Moat Trend Rating: Stable

PayPal Earnings Update

While narrow-moat PayPal (PYPL) continues to struggle with some headwinds, in our view, its second-quarter results suggest the company is holding up relatively well. Additionally, the company announced some targets in terms of capital return and cost reductions that we view favorably. We continue to believe the shares are materially undervalued and will maintain our $135 fair value estimate.

Net revenue increased 10% year over year on a constant currency basis, or 14% excluding the impact of eBay. Payment volume increased 13% on a constant currency basis. Management noted that they believe they continued to gain market share in the quarter. While we believe the market has been focused on near-term absolute growth, we see market share as a bigger determinant of the company’s competitive position and long-term value.

Active accounts held steady sequentially and are up 3 million from year-end. Management reiterated its target for 10 million net new accounts for the full year, a level that is well below the company’s historical experience. However, we think pivoting toward driving higher usage among existing accounts makes sense, and we are encouraged by the 12% year-over-year growth in transactions per account, which represents a modest acceleration from recent quarters, and possibly some growing traction on this front.

PayPal Margins Fall

Adjusted operating margins fell to 19% from 27% last year, as the company absorbed the loss of the high-margin eBay relationship and normalization in transaction losses. However, we continue to believe the company can restore and improve margins over time. Management expects to realize $900 million in cost savings this year, and $1.3 billion by 2023. The latter figure would represent about 4 percentage points of our expected 2023 revenue.

Management has repurchased $2.25 billion in shares in the first half of the year and expects to repurchase $4 billion this year. Given the current share price, we view a more aggressive approach to repurchases as a positive.