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Stock Analyst Update

PayPal Continues to See Strong Growth

The company is sustaining its strong growth trajectory, but we think the current market price is overly rich.


Overall, we think  PayPal’s (PYPL) second-quarter results show the company sustaining its strong growth trajectory. We will maintain our narrow moat rating and $68 fair value estimate. While we like the company’s long-term prospects, we continue to believe the current market price is overly rich.

Total payment volume was up 29% year over year, marking a slight deceleration from recent quarters. However, stripping out currency effects, growth on this front was in line with recent results. PayPal continues to see solid increases in active accounts and payments per account, which were up 15% and 9% year over year, respectively. We think the company’s ability to expand on both fronts helps to solidify its long-term prospects.

Transaction margin for the quarter was 56.0%, a slight decline sequentially but in line with results over the past year. Operating margins improved to 14.8% from 13.7% last year. We think the company’s growth and the scalability of the business model will allow for solid margin expansion over time.

During the quarter, the company bought back $500 million in shares; it has repurchased $2.3 billion so far this year. Given that we think the shares are overvalued, we don’t see the pickup in share repurchases as value-creative, but in our view, the aggression on this front demonstrates that PayPal is operating from a position of strength, especially as it announced $2.7 billion in acquisitions during the quarter. PayPal’s strong growth and profitability and its capital-light business model should add up to significant flexibility in terms of capital allocation in the years to come.

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Brett Horn does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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