Detailed Review of PayPal's (PYPL) First Earnings and Analyst Wrap

PayPal (NASDAQ: PYPL) reported its first quarter as an independent company last evening and we had a chance to review a number of sell side notes. Analysts for the most part are looking through the top line miss and expecting the earnings support to carry the stock higher as volumes continue to improve. Notes from the call, key metrics and analyst commentary follows:

Paypal reported quarterly results with revenue missing consensus by less than 1%. Weaker China and Europe were to blame for the revenue miss but improving margins more than made up for light top line with EPS beating by 6%. The majority of the analysts reduced forward revenue estimates while increasing EPS although several where higher than consensus and left out year EPS unchanged.

TPV of $70B was up 27% Y/Y (ex-F/X), driven by accelerating US TPV growth 28%. Mobile transactions and Merchant services are both growing faster than top line revenue (at 38% and 34% respectively) and stood out as the metrics to watch.

Take Rates were affected by discounted pricing for large merchants and increasing Braintree/Venmo volumes. The transaction take rate declined 7 bps q/q and 17 bps YoY. Even though the reduction in take rates will pressure profitability, Paypal management managed expectations and analysts seemed to accept this as part of the long term growth strategy.

One Touch payments began rolling out to 16 markets in mid Q3, with 100% availability in the U.S.. There appears to have been rapid consumer adoption with 7M consumers having opted into One Touch.

Venmo processed over $2.1B in payment volume, up 200% y/y. Along with the rapid growth rate, engagement is also higher than with the core as users interacted with the app multiple times per week. PayPal is also testing monetization opportunities by enabling users to "pay with Venmo" at select PayPal merchants this quarter. If the pilot goes well, management expects the platform to be fully monetized by the end of 2016. When fully rolled out, the take rate would also be the same as PayPal's traditional merchant services rate providing support for this important metric.

Despite weaker take rates, operating leverage improved, as pro-forma operating margins expanded 200bps.

Key quarterly metrics:

-The take rate contracted 16 bps y/y and 7 bps sequentially on discounts for large merchants and increasing Venmo transactions.

-Merchant Services volume was $56B, up 34% YoY ex-FX, representing 80% of PYPL's TPV New active accounts grew 4M q/q to 173M on new partner relationships.

-Total number of merchants on the platform is now 13M.

-TTM transactions per active account improved to 27x from 24x in 3Q'14.

-Mobile accounted for 345M transactions, up 38% YoY.

Michael Graham at Cannacord noted that even though the take rate was down, it was less than expected. He raised his price target to $44 (from $43), applying a consistent 25 multiple to slightly higher 2017 EPS estimate of $1.75 (from $1.72)

Robert Peck from Robinson Humphrey reduced revenue estimates but left EPS estimates unchanged as a result of the improving margins. He reiterated his Buy rating and $45 PT.

Colin Sebastian from Baird noted that PayPal’s significant growth opportunities stem from the disruption in financial services caused by the digitization of money and broader shift to the mobile web. He recommended buying on pullbacks and reiterated his Outperform rating and $45 PT.

Daniel Perlin from RBC maintained his Outperform rating and $46 PT. He notes that “PayPal is in its early-stage life cycle as a public company and thus is initially absorbing independent company costs that should be leveraged over the next 2–3 years”.

Michael Tarkan from Compass Point thought the quarter was noisy but reiterated his Buy rating and $45 PT. He stated “a lower take rate and unfavorable foreign currency was offset by strong expense control and a lower than expected tax rate”. Despite the income statement issues, he notes that the profit is flowing through to the balance sheet. Paypal “generated $519M of free cash flow during the quarter, up 20% YOY, and FCF as a percentage of revenue expanded 100 bps annually and 600 bps sequentially to 23%.”

Jason Kupferberg from Jefferies “viewed the print positively, and was surprised to see shares down”. He thinks the shares look attractive and the “scarcity value” will command a higher multiple in time. He reiterated his Buy rating and $44 PT.

Shares of PayPal last traded down 1.8% to $35.86.

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