Paypal Holdings Inc: Michael Graham Has a Wary Eye on Transaction Expense as Customer Choice Expands

Canaccord's Michael Graham sets neutral expectations on the U.S.

Paypal Holdings Inc (NASDAQ:PYPL) is gearing up to drop its fourth quarter results after market close, and investors will be highly anticipating to see the company’s “most scrutinized metric;” its total payment volume (TPV) growth.

At least, this is what top analyst Michael Graham at Canaccord wagers, wondering whether the payment giant can maintain “robust” gains on the TPV front. Additionally, the analyst asks whether operating leverage can maintain now that consumer choice has expanded with partnerships between Visa and Mastercard.

For now, the analyst reiterates a Hold rating on PYPL stock with an $80 price target, which implies a 5% downside from current levels.

Ahead of tonight’s earnings show, the analyst forecasts 30% in TPV growth, noting that this is withstanding the fact last year’s comp was “easier,” which lends itself to “an achievable number.” As far as operating margin is concerned, Graham would not be surprised to see the fourth quarter prove to be “exceptional” here, betting on a 23.3% GAAP margin- which would be eBay’s best yet. However, expectations for the new year also have Graham looking for operating leverage to moderate in sales and marketing as well as in product development expense lines.

“Admittedly, we have been mostly wrong on the stock as the company has impressively balanced out higher transaction expenses (our primary concern) with better-than-expected opex leverage. We have raised our margin estimates marginally since; but, we are keeping a watchful eye on transaction expense as consumer choice expands even further. One Touch and Venmo TPV growth have helped top-line GMV numbers, but it is still too early to tell if the Pay with Venmo initiative will have a more meaningful impact on revenue than the optimism already priced into the stock. We also highlight Apple Pay, Android Pay, and the potential (but far from certain) rise of cryptocurrencies as risk factors that are difficult to quantify right now,” underscores Graham.

Ultimately, shares are not cheap, as the analyst concludes: “Though it has recently been more closely comped to the card networks Visa and MasterCard instead of its traditional payment processor comps of Fiserv, Vantiv, Global Payments, and Total System Services, it still remains relatively expensive.”

Michael Graham has a very good TipRanks score with a 62% success rate and a high ranking of #144 out of 4,757 analysts. Graham realizes 16.2% in his annual returns. When recommending PYPL, Graham yields 9.8% in average profits on the stock.

TipRanks highlights a robust bullish parade on Wall Street when it comes to Paypal’s market opportunity at play. Based on 28 analysts polled in the last 3 months, 23 rate a Buy on Paypal stock with only 5 maintaining a Hold. Is the stock overvalued or undervalued in terms of these analysts’ expectations? Consider that the 12-month average price target of $85.96 suggests a slight nearly 3% upside potential from where the stock is currently trading.

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