PayPal Earnings Preview: Will PayPal's Q2 Pay Off Despite Macroeconomic Uncertainty?

PayPal Inc. PYPL stock has been on a secular downtrend since July 2021 and it has plummeted about 71% from its all-time high of $310.16 on July 26, 2021.

The improvement in the pandemic situation, which allowed people to shop at physical stores, and former parent eBay Inc.’s EBAY decision to have its own payment processing platform were among the reasons for the predicament.

The good news is that the stock has embarked on a mini-uptrend since bottoming at $67.58 on June 30. The payment processor is scheduled to release its second-quarter results Tuesday after the market close. Will the second-quarter report add strength to the recent momentum?

Key Q2 Expectations: Analysts, on average, expect the company to report second-quarter non-GAAP earnings per share of 86 cents per share on revenue of $6.78 billion, according to Benzinga Pro data.

This compares to the year-ago quarter’s EPS and revenue of $1.15 and $6.24 billion, respectively. PayPal's guidance calls for 9% year-over-year revenue growth and non-GAAP EPS of 86 cents per share.

Going by near-term EPS performance, PayPal reported in-line results in the first quarter but missed expectations in the fourth quarter of 2021.

Other Metrics To Watch:

• Total payment volume
• Net new accounts added, particularly by its peer-to-peer Venmo application
• Performance of “buy now, pay later' business
• Operating cash flow/free cash flow

Related Link: How Will PayPal Trade After Q2 Earnings? What The Stock Chart Says

Weak Macro A Sore Point For PayPal: Ahead of the earnings, Morgan Stanley analyst James Faucette said he expects weak e-commerce trends to weigh on PayPal’s growth in the medium term.

“While we expect PayPal to keep gaining share vs. the market, the eventual normalization of underlying e-commerce is likely required to drive shares higher,” he said.

Underlining the softness, Mastercard SpendingPulse data showed e-commerce spending decelerated in the second quarter to 0.5% growth from 3.8% growth in the first quarter, Faucette noted.

“We think investors probably won't turn positive on PYPL until they have confidence that eCommerce growth can normalize to a pre-Covid rate of expansion,” Faucette added.

Retail giant Walmart, Inc.’s WMT negative preannouncement also goes on to prove that consumer spending is slowing.

Forward Outlook: The Street expects the company to report full-year non-GAAP EPS of $3.85 and revenue of $28.18 billion, up an estimated 11%. In April, PayPal lowered its top- and bottom-line guidance to 11%-13% growth and $3.81-$3.93, respectively, citing economic challenges, a COVID resurgence in China and the Ukrainian war.

Canaccord Genuity analyst Joseph Vafi is optimistic about PayPal given its market leadership and the possibility of market share expansion.

The analyst sees the following catalysts for the company:

• Acceptance of Venmo as a payment option on Amazon.com Inc. AMZ later in 2022
• High growth in Braintree, Crypto, personal finance
• Lapping of eBay and the COVID surge

PayPal will likely be a major beneficiary of strong e-commerce growth over the next five years, Vafi said. PayPal looks attractive among larger-cap techs, he added.

Morgan Stanley’s Faucette said PayPal investors shouldn’t expect margin expansion in the current environment due to the following factors: investments required to survive in a tough competitive landscape, big tech companies such as Apple Inc. AAPL sounding out their intention to compete in the space and significant tech investment to integrate functionalities into both PayPal and Venmo digital wallets.

PYPL Stock Take: In premarket trading on Tuesday, PayPal’s shares are moving down 0.78% to $87.87, according to Benzinga Pro data.

The average analyst price target for PayPal is $105.81, according to data compiled by TipRanks. This suggests there is scope for about 20% upside potential.

Canaccord has a Buy rating and $160 price target on PayPal shares.

Morgan Stanley analyst Faucette has an Overweight rating and $129 price target.