PayPal reported a solid Q2 with better-than-expected revenue of $3.86B (vs. analysts' estimate of $3.81B) and EPS of $0.58 (vs. estimates of $0.57).
Remember: the business generates revenue from transaction volume on PayPal's sites, multiplied by its "take rate" on those transactions (i.e. how much PYPL takes out of each dollar that is transacted on PayPal.com).
In Q2, PayPal's transactions grew a robust +28% annually to 2.327B, better than expected. However, its transaction take rate was 2.38%, lighter than analysts' estimate for 2.40%. As a result, PayPal's transaction revenue was slightly lower than the market expected.
Investors were clearly a bit underwhelmed with the results when compared to their very high expectations (with the stock up +24% YTD heading into today). The combination of the declining take rate and already-elevated expectations drove PYPL down 3% after-hours.
Going forward, management provided roughly in-line guidance for a revenue and earnings perspective for Q3 and full year 2018. Also, they announced a new $10B stock buyback authorization, which should help accelerate EPS growth in coming quarters.
Overall, this quarter doesn't change our fundamental view on the business. As they say, "one quarter doesn't make a year." One quarter of mostly in-line metrics doesn't suggest a fundamental weakening in PYPL's moat, in our view.
And at a higher level, it was an important strategic quarter for PayPal as the company announced four acquisitions that advance its merchant value proposition and geographic reach. PayPal's decision to become an open platform is increasing its value proposition to both consumers and merchants.
Hedge fund manager Dan Loeb sees PYPL's stock rising to $125+ within 18 months as transaction volumes continue to grow and as take rate stabilizes, driving higher EPS than the market expects.