Conflicting Views On Paypal's Margins

Following Paypal Holdings Inc's PYPL first quarter results, sell-side analysts offered diverging views on the company's margin trajectory. While Jefferies suggested the company's margins shined, Loop Capital Markets opined that take rate and transaction margin deterioration continues.

Jefferies analysts Ramsey El-Assal and Brian Fitzgerald attributed the above-consensus earnings per share (3 cents above the consensus) to the 50 basis point-expansion in margins. Revenues were also above estimates, the analysts noted.

The firm noted TPV growth of 22.5 percent exceeded its estimate of 22 percent and adjusted operating income margins improved 50 basis points to 21.6 percent, ahead of its 20.8 percent estimate.

This, according to the analyst, demonstrates PayPal's ability to offset transaction margin pressure with opex leverage.

Loop Capital's Joseph Vafi noted that much of the transaction margin deterioration was offset by considerable fixed cost leverage, although he is of the view that the scenario can only continue for so long.

"Given that we expect transaction margins to continue to deteriorate, any slowdown in monetized TPV growth could lead to an accelerated slowdown on the bottom line," the analyst added.

Based on the first quarter results, the analyst believes the new revenues are coming in with materially lower profits versus a year ago.

However, the analyst remains wary whether the company can sustain its premium, given the ongoing transaction margin compression. This is despite the analyst believing EPS growth remaining good, based on a combination of TPV growth, cost containment and share buybacks.

2017 Expectations to Improve

Jefferies noted that PayPal raised the full year guidance by 1 percent at the mid-point and the earnings per share estimate by $0.05 at the midpoint to $1.77. Further, the company maintained its free cash flow estimate of greater than $2.7 billion.

For the second quarter, the company expects revenues of $3.050 billion to $3.1 billion and earnings per share of $0.41-$0.43. This, according to the analysts, compares favorably with the consensus estimate that called for revenues of $3.070 billion and earnings per share of $0.41.

Rating Action

Jefferies has a Buy rating and a $52 price for shares of PayPal, while Loop Capital maintained its Hold rating and raised its price target to $46 from $44, based on its fine-tuned up earnings per share estimate.

At time of writing, shares were rallying 7.17 percent to $47.60.

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