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Bernstein Thinks PayPal Stock Could Rise More in 2020

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PayPal (NASDAQ:PYPL) stock has generated decent returns in the past year. The stock gained 28.6% in 2019—almost inline with the S&P 500, which rose 28.9% during the same period. PayPal’s peers, Square (NYSE:SQ) and Shopify (NYSE:SHOP) have returned 11.5% and 187.2%, respectively.

PayPal stock rose about 1.96% on Wednesday and closed the trading day at $111.82. The stock is trading about 8% lower than its 52-week high of $121.48. Also, the stock is trading around 29.1% higher than the 52-week low of $86.62. At the closing price on Wednesday, PayPal’s market value was around $132 billion.

We noted that the recent jump in PayPal stock was due to an analyst upgrade. The company is also gaining steam amid acquisition and partnership deals. PayPal reported upbeat third-quarter earnings on October 23, which also lifted the stock. We think that the company could rally higher in 2020.

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Bernstein upgraded PayPal stock

On Tuesday, a Sanford C. Bernstein analyst upgraded PayPal stock to an “outperform” from a “market perform” rating, according to CNBC. Analyst Harshita Rawat also raised the company’s 12-month target price to $130 from $115.

On the same day, Bank of America analyst Jason Kupferberg upgraded the rating and target price on Square stock. Kupferberg raised the rating on Square to “buy” from “neutral.” He increased the target price to $75 from $70.

Bernstein’s views on PayPal stock

Notably, Rawat expects positive estimate revisions for 2020.

Last year, she forecasted “negative revisions” for PayPal in 2020, as reported by Bloomberg. Rawat had concerns related to stiff competition from peers, the Venmo payments app, and execution issues related to partnerships. PayPal has partnerships with MercadoLibre (NASDAQ:MELI) and Uber Technologies.

Now, Rawat expects a “compelling one-year bull case.” Bernstein has higher expectations from the partnerships mentioned above. Rawat is optimistic about PayPal’s pricing, the Honey Science buyout, and the monetization of the Venmo app. She thinks that there’s enough room for margin expansion along with a “palatable” valuation, according to Bloomberg.

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PayPal completed the buyout of Honey Science for about $4 billion in cash on Monday. Honey Science is an online coupon startup. The company gathers data from customers’ buying habits and offers coupons. Honey Science has around 17 million monthly online and mobile users, which would help expand PayPal’s customer base. The Honey Science acquisition will also strengthen PayPal’s presence in the e-commerce market globally.

PayPal’s financial performance compared to peers

PayPal delivered better-than-expected earnings in the third quarter of 2019. The company’s sales grew 19% YoY (year-over-year) in the third quarter, while the adjusted earnings rose around 5% YoY. Excluding losses due to investments in MercadoLibre and Uber, PayPal’s adjusted earnings grew 31% YoY. The company’s operating margins also expanded by more than 200 basis points in the third quarter to 23.4%.

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PayPal added around 9.8 million net new active accounts, which brought the total active accounts to 295 million. The company’s active accounts are 16% higher compared to the same quarter the previous year. PayPal’s TPV (total payments volume) rose around 25% YoY in the third quarter. Venmo processed over $27 billion of the TPV in the third quarter, which grew 64% from the same quarter the previous year.

PayPal’s Venmo payments app had 40 million users at the end of March, according to a CNBC report. In comparison, Square had 15 million Cash App monthly active users as of December 2018.

During the third-quarter earnings call, PayPal CEO Dan Schulman announced that the company would offer its payment services in China. He stated that PayPal “will be the first foreign payments platform to be licensed to provide online payment services in China.” We noted that PayPal completed the acquisition of a 70% equity interest in China-based Guofubao Information Technology in December. The Guofubao acquisition has allowed PayPal to enter China’s payments market, which is led by local players like Alibaba’s (NYSE: BABA) Alipay and Tencent’s WeChat Pay. Overall, PayPal is optimistic. The company expects gains from expanding its service offerings in China.

PayPal also has strong cash flows. As of September 30, the company’s cash, cash equivalents, and investments totaled $13.2 billion, while the long-term debt was around $5 billion. The company also repurchased approximately 3.26 million shares for about $350 million in the third quarter.

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Growth outlook

For the fourth quarter, PayPal expects its revenues to grow to $4.89 billion–$4.95 billion. The revenue growth rate would be around 16%–17% for the fourth quarter. The company forecasts the adjusted EPS to be $0.81–$0.83 in the fourth quarter.

For 2019, PayPal expects its adjusted EPS to be $3.06–$3.08. The company also expects its revenues to grow by around 15% YoY to a range of $17.70 billion–$17.76 billion in 2019. The revenue guidance includes the impact of the sale of the US consumer credit receivables portfolio to Synchrony.

Analysts expect the company’s fourth-quarter revenues to grow by 17% YoY. Wall Street analysts predict the 2019 revenues to grow by 14.9% YoY. Meanwhile, for 2020, analysts expect the revenue growth rate to increase to around 17% YoY.

Wall Street analysts expect the company’s earnings to grow by 19.6% in the fourth quarter. Analysts forecasted earnings growth of 26.7% for 2019. However, they expect the earnings growth rate to fall to 13.8% in 2020.

Analysts’ recommendations and target price

Among the 42 analysts covering PayPal stock, 36 recommend a “buy”—up from 35 analysts in the previous month. Six analysts recommend a “hold”—down from eight last month. Meanwhile, none of the analysts recommend a “sell” on PayPal stock. As of Wednesday, analysts have given the stock a 12-month average target price of $128. Based on the closing price, the target price represents a potential upside of 13.6%.

Reading PayPal’s technical levels

PayPal’s 14-day RSI (relative strength index) score is 63.32. The RSI indicates that investors are currently neutral on PayPal stock. However, the stock is near the “overbought” range. Notably, an RSI reading of over 70 indicates that a stock is in “overbought” territory, while an RSI level of below 30 means that the stock is in “oversold” territory.

On Wednesday, the stock closed near its Bollinger Band upper range level of $112.13. The value shows that PayPal stock is in “overbought” territory.

Looking at analysts’ views and technical indicators, we think that PayPal stock could rise in 2020.

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