PayPal (NASDAQ: PYPL) stock is up over 30% in the last month. After posting excellent Q2 results, it takes the spotlight as my stock of the week. With that in mind, I think PayPal could rebound in the current stock market recovery.

Investment pays off

After the fintech firm reported its Q2 numbers, PayPal saw its stock rise by more than 10%. This was because it beat a number of analysts’ estimates on both its top and bottom lines. In fact, the company managed to surpass its own guidance on the majority of metrics!

Nevertheless, the firm’s EPS saw a substantial decline. However, this was because of lower transaction margins from eBay, and the last year’s numbers getting a boost from the release of unneeded allowances for bad loans. Taking those factors into consideration, EPS stayed flat on a year-over-year (Y/Y) basis.

Pals bring quality

Since PayPal revised its goal of bringing more quality than quantity, it’s seen user growth decline, but PTPAA has gone up steadily. This was evident in this quarter’s numbers, with minuscule NNA, but robust PTPAA growth.

The growth can be attributed to two reasons. The first is the rise in core daily active users, which has seen a rise of more than 40% since 2019. This is crucial for PayPal because 80% of its transactions come from 30% of its most active users. The second is the continued growth of Venmo, which ended up driving more than 50% of PayPal’s revenue growth in Q2.

As such, management provided a decent outlook for the rest of the year. The Nasdaq-listed firm now expects Q3 revenue of $6.8bn, with an upwardly revised non-GAAP EPS of approximately $0.95. For the full year, it expects 10% revenue growth, with a non-GAAP EPS of approximately $3.92. The board also forecasts to grow TPV by 12%, add 10m more accounts, and have a free cash flow of at least $5bn.

Long way to grow

So, is PayPal stock worth a buy? Well, all signs seem to point towards yes. Aside from the excellent numbers and guidance provided, the impact on its cost savings are yet to be realised. Interim CFO Gabrielle Rabinovitch mentioned that PayPal expects $900m worth of cost savings in FY22, and a further $1.3bn next year. She also reiterated that the payments processor expects operating margin expansion of at least 0.5% starting in Q4. And with core markets yet to be fully penetrated, PayPal still has a long way to grow as it expands its digital wallet features to more regions worldwide.

Nonetheless, it’s worth noting that PayPal sits on $10.6bn worth of debt. But with no maturities for the rest of the year and margin expansions on the horizon, I’ve no doubt that incoming CFO Blake Jorgensen will be able to navigate through its debt pile without too much hassle.

Finally, the company saw its take rate remain flat at 2% (yoy), which is great news as PayPal continues to maintain its transactional margins while seeing TPV increase and growing its market share. Therefore, I think PayPal has a position on my portfolio with an average price target of $119.29.

The post Stock of the week: PayPal outperforms in Q2! appeared first on The Motley Fool UK.

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John Choong owns shares of PayPal. The Motley Fool UK has recommended PayPal Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The Fed is no Pal

Just like PayPal stock, US retail sales figures have been steadily declining since February. In fact, retail sales came in at -0.3% in May, on a month-on-month basis. This is an indication that consumer spending is decreasing as a result of higher interest rates.

The US Federal Reserve is committed to increasing interest rates until inflation retreats back down to 2%. Consequently, several analysts are pencilling the odds of a recession at 50%. If this were to happen, I expect the suffering for PayPal shareholders to get worse.

With less money flowing throughout the US economy, the platform stands to earn less from payments and transfers. This is because higher interest rates means higher borrowing costs, limiting the flow of cash around the economy.

More than just PayPal

Nonetheless, PayPal has a couple of interesting developments that could make it a fortune in the long term, as the fintech group has several brands to it. These businesses are seeing encouraging growth and progress. The list includes PayPal itself, Venmo, Braintree, Paidy, Xoom, Honey, iZettle, and Hyperwallet. I’m extremely upbeat about the group’s future prospects beyond its main business. But in particular, I have my attention focused on Venmo’s prospects as an American mobile payment service.

The company has lined up partnerships with Amazon and Doordash. These big firms are expected to integrate Venmo into their payment options later this year. If successful, I envision these collaborations to bring a flood of cash to the top line for PayPal.

Quantity over quality

Having said that, it’s worth noting that the core business still remains susceptible to harsh economic headwinds. Analysts have revised the stock’s average earnings per share down from $1.24 to $0.97 for the year.

Not to mention, its Venmo partnerships are yet to come into effect. For one, management has been silent on when the Amazon partnership will take place. Secondly, Doordash is yet to agree to business terms and conditions.

However, what concerns me most is its profit margins, which have been on a decline over the last four quarters. PayPal has to compete with the likes of Wise and Western Union, having lost market share over the years. Its current take rate is 2%, which is higher than Wise’s. Therefore, for it to continue being competitive, it’ll have to cut down its margins in order to retain/grow its transaction and customer volumes.

Thinning profit margins (Despite increasing volume) shows that PayPal is losing its pricing power and market dominance. As such, I won’t be buying more PayPal stock for now. Instead, I’ll be holding onto my shares in hopes that the Amazon partnership bears fruit.

The post Should I buy PayPal stock in July? appeared first on The Motley Fool UK.

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John Choong owns shares of PayPal at the time of writing. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Amazon and PayPal Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More pals

PayPal managed to surpass expectations with a growth rate of 8% year on year (Y/Y), as revenue came in at $6.5bn. Its earnings per share (EPS) was also in line with consensus, at $0.88 on a non-GAAP basis. Additionally, total payment volume (TPV) was up 15% Y/Y. The number of transactions per account was also up 11% on annual basis. Moreover, the fintech company added 2.4m net new active customers. PayPal’s Venmo business also saw a 12% increase Y/Y in TPV. These are all good signs.

A price to pay

While the figures for Q1 were great, the numbers behind the curtain make me worry as an investor. PayPal saw a 32% decline in free cash flow as the company incurred a -$0.20 EPS loss from lower transaction margin dollars from eBay. This was made worse by a loss from taxation (-$0.07 EPS) and credit losses (-$0.06 EPS). As for the elephant in the room, Russia, the loss of revenue from the region created a -$0.03 EPS loss from the suspension of transactional services.

To make matters worse, PayPal’s assets decreased as liabilities went up. Although the firm’s balance sheet is still in a rather healthy state, it could take a wrong turn if finances are not managed efficiently. The imminent departure of CFO John Rainey may not help.

More importantly, PayPal saw its take rate continue to decline along with its transaction margin losing 5%. Take rate is the percentage PayPal takes from each transaction as a form of commission, and is its main stream of income. With competition rising from other fintech companies such as Block and Wise, PayPal has been forced to lower its take rate to stay relevant. Although the discounted take rate has encouraged transaction volume, it’s only a matter of time before it starts impacting profit margins further.

Blue chip

On the brighter side of things, there are a couple of expansions that should help PayPal’s traffic. The introduction of PayPal Later in Japan and Germany, as well as Savings to PayPal Wallet in the US should bring some much needed momentum to PayPal’s growth. Nevertheless, 8% earnings growth isn’t ideal for a supposed growth stock.

So, is the PayPal growth story over then? It could be. The biggest fintech company in the world continues to lose market share to its peers. Venmo, seems to be the firm’s only growth prospect, but a TPV growth rate of 12% isn’t going to boost the PayPal share price to its highs of $300 anytime soon. Not to mention, the firm refuses to disclose the proportion of income it generates from its respective businesses in greater detail, which leaves me concerned as a shareholder, as this usually means that revenue isn’t meaningful enough. As such, I will be holding to see what comes of the Amazon partnership later this year.

The post PayPal earnings matches Q1 estimates. What now? appeared first on The Motley Fool UK.

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John Choong owns shares of PayPal at the time of writing. The Motley Fool UK has recommended PayPal Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

A new tax year starts on 6 April, and with it comes a renewed £20,000 ceiling that I can invest in my Stocks and Shares ISA. So, here are the three best stocks I’m buying to try to beat the market!

Stock pick #1 – Alphabet

Warren Buffet has always said that the best companies are those that exhibit solid fundamentals, strong earnings power, and the potential for continued growth. Alphabet (NASDAQ: GOOGL) manages to tick all these boxes. With a strong balance sheet, a 29.5% profit margin, and plenty of room for earnings growth with some analysts predicting a 22% upside to its current share price, the Google-parent stock is a no-brainer for me. Furthermore, despite having legal challenges as a big tech company, Alphabet has a history of outperforming the S&P 500. Its upcoming stock split this summer could work wonders for the share price as well. History has shown that stock splits tend to boost share prices as they encourage higher trading volume. Therefore, a solid balance sheet accompanied by strength in the search engine and advertising space makes Alphabet a hybrid defensive-growth stock for my Stocks and Shares ISA.

Stock pick #2 – PayPal

Although the PayPal (NASDAQ:PYPL) share price is 60% off its all-time-high, I think the fintech company still has plenty to offer. Despite a miss on its earnings last quarter, I am excited by PayPal’s revised business model. The platform is targeting more activity per user rather than more users. This is music to my ears because I value quality over quantity. Its partnerships with Amazon, Starbucks, and Doordash to integrate Venmo, an American mobile payment service it owns, will also provide a boost to its revenue. Its previous partnership with eBay generated a sizeable portion of revenue, showing me that PayPal has had some historical success. It could, however, suffer the effects of a high interest rate environment as transaction volume could slow down. Despite its interest income segment earning it revenue, it might not be sufficient to keep investors happy. Yet it’s also hedged against such a potential slowdown. The firm’s interest income segment hedges against rate hikes as it stands to earn revenue from interest too.

Stock pick #3 – Astra Space

Next up on my list is Astra Space (NASDAQ: ASTR). Astra sends small rockets into space to deliver satellites and other payloads for its commercial customers. As a pre-profit company, Astra carries a high level of risk, but with it also comes a high potential upside to its current share price. Since the Alameda-based company launched its first successful payload in March, the share price has shot up 21%. With more launches lined up and monthly launches planned for the rest of 2022, there could be room for the share price to continue growing. Astra also boasts a flawless balance sheet with zero debt, adequate cash levels, and a healthy cash burn. This gives me plenty of confidence to continue buying Astra shares as there is a low probability that the company will need to raise capital in the near future.

No dividends

These are all growth stocks with no official dividends. Nevertheless, the potential upside to the stocks’ share prices offsets the growth of regular dividend-paying stocks, in my opinion. This is why I’ll be buying all three stocks for my portfolio.

The post My top 3 picks for my Stocks and Shares ISA! appeared first on The Motley Fool UK.

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John Choong owns shares of Alphabet (Class A shares), Astra Space, and PayPal at the time of writing. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Alphabet (A shares), Alphabet (C shares), and PayPal Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Crude set to clatter lower?

A stream of disappointing data from China this week has once again brought the sellers out in force, with Brent crude prices sinking to two-month lows below $45 per barrel as a result. And I believe plunges to fresh multi-year troughs can be expected as the world swims in excess supply, a terrifying scenario for the likes of ‘black gold’ explorer Enquest (LSE: ENQ).

The International Energy Agency (IEA) has done market sentiment no favours by advising on Friday that OECD oil supplies stand at a whopping 3 billion barrels, adding that “oil market bears may choose not to hibernate,” particularly if forecasts of a cold winter in the US and Europe fail to materialise.

Enquest saw revenues slump 12% in January-June thanks to the diving oil price, to $444m, while net debt cantered to $1.28bn from $932m a year earlier. I believe additional trouble can be expected as demand levels drop and supply rattles relentlessly higher.

Stakes rise in payments battle

American tech colossus Apple (NASDAQ: AAPL.US) is making huge waves in the business of mobile payments. Its Apple Pay platform launched last year allows users to make payments to certain retailers with a simple swipe of their iPhone, and the company now has the likes of PayPal (NASDAQ: PYPL.US) in its sights if latest rumours are to be believed.

The Wall Street Journal has announced that Apple is in discussion with several US banks to launch its own peer-to-peer payment service, a move that would provide direct competition to the likes of PayPal and its Venmo platform.

If discussions progress well Apple’s new service could be launched as early as next year, and could provide earnings with a further boot higher thanks to the ubiquity of its products in an increasingly cash-less world. I reckon that PayPal’s dominance of this fast-growing market is suddenly looking a little less robust.

Valves play under pressure

Like Enquest, I believe that a backcloth of persistent oil price weakness should weigh on revenues at valvebuilder Rotork (LSE: ROR). The Bath business advised today that “the trading environment has remained challenging across most of our key markets and geographies,” and that although full-year guidance remains unchanged from September, revenues during July-September had slipped 18.1%.

On top of this, Rotork’s group orders had slumped 17.2% in the period, a worrying precursor for future revenues, while the firm’s admission that “the timing of order placement and product delivery remains difficult to forecast” should also send shivers down investors’ spines. With oil producers the world over sagely scaling back capex given current market troubles, I believe the worst could be far from over for the valve manufacturer.

The post Are Apple Inc., Paypal Holdings Inc, Enquest Plc & Rotork p.l.c. Buys Today? appeared first on The Motley Fool UK.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK owns shares of Apple. The Motley Fool UK has recommended Rotork. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.