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According to the earnings calendar, PayPal (NASDAQ: PYPL) is expected to announce its second-quarter results on July 28. So, what should investors expect from this fintech company that is part of the S&P 500? PYPL stock has already returned 722% since its IPO in 2015 and has crushed the S&P 500 which has gained 133% in this period.
Does PayPal stock have enough steam to add to its year-to-date gains of 28%? A lot depends on its second-quarter results due in the next week.
PayPal sales forecast to rise by 19% in Q2
According to average analyst estimates PayPal is expected to increase sales by 19.1% year over year to $6.27 billion in Q2 compared to sales of $5.26 billion in the prior-year period. Comparatively, its earnings growth is forecast to rise by 5.6% to $1.13 per share.
In the last five years, PayPal sales have risen by almost 19% on an annual basis while net income has grown at a compound annual growth rate of 31.3%. One of the primary reasons for its stellar revenue growth is the company’s increase in its active accounts. PayPal has grown its active accounts from 169 million in June 2015 to over 380 million at the end of Q1. Its high operating leverage has allowed PayPal to expand profit margins at a faster rate compared to revenue.
PayPal has been a disruptor in the fintech space and the demand for digital payment solutions accelerated amid the pandemic. The world is fast moving towards a cashless transaction system and PayPal is at the forefront of this change.
Its payment volume was up 50% year over year in Q1 and stood at a record $285 billion. The company derives a majority of sales from transaction fees which in turn is dependent on transaction volume.
Further PayPal’s peer-to-peer payments service known as Venmo saw payment volume increase by 63% on its platform compared to the March quarter of 2020.
This strong quarter led to an increase in management forecast for 2021. PayPal estimates revenue to grow by 20% this year which is more than impressive for a company valued at a market cap of $354 billion.
What next for PYPL stock?
PayPal expects 55 million net new accounts to be added in 2021. Company CEO Dan Schulman believes the company may reach 1 billion daily active accounts over the next few years given the exponential rise of the gig economy and the worldwide transition towards digital payment solutions.
PayPal continues to expand its suite of innovative solutions and recently enabled customers in the U.S. to buy and sell cryptocurrencies. It has also added the option for QR code payments for traditional retail clients to accept payments in person.
The company has processed over a trillion dollars in cumulative payments in the last 12-months. It has generated close to $23 billion in sales and over $5 billion in free cash flow in this period. PayPal ended Q1 with $19 billion in cash reserves and long-term debt of about $9 billion, which means it has sufficient liquidity to reinvest in innovation or acquire other fintech disruptors.
PYPL stock is valued at a forward price to sales multiple of 13.7x and a price to earnings multiple of 64x which might seem expensive. However, its earnings are forecast to rise at an annual rate of 23.5% in the next five years.
Wall Street remains bullish on PayPal. Out of the 42 analysts tracking PayPal, 35 have a “buy” recommendation and seven recommend “hold”. There are no sell recommendations.
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