and Square have soared this year as consumers and businesses decided they would better not touch cash in a pandemic. But while valuations aren’t easy to bear, analysts at Deutsche Bank and Oppenheimer say shares should continue to post gains.
PayPal’s (ticker: PYPL) business was turbocharged of consumers who have switched from cash to digital payments during the pandemic. The company has been adding record new accounts this year, and it’s seen Increase in payment volume. The sustainability of that growth is an overhang for the stock, but Deutsche Bank’s Bryan Keane says it could actually be accelerating, spurring top-line and earnings growth that’s likely to beat consensus estimates.
“We believe PYPL may indeed show accelerating trends and sustained higher long-term growth throughout the quarter,” he wrote in a note published Wednesday. He sees potential for currency-neutral sales growth of “a low 30%” in the third quarter, ahead of the company’s 25% guidance, and sees earnings per share growth of 36%, also above current estimates. Additionally, PayPal has “plenty of room to raise guidance throughout the year,” he writes.
Keane reiterated a Buy rating on the stock and a price target of $234, implying a 28% gain from recent prices around $183.
Barrons wrote positively about PayPal this week cover storyalthough we were less positive on Square due to the stock’s high valuation.
PayPal is benefiting from the growth of new users, particularly among “silver-tech” seniors who are making the switch to online payments during the pandemic, Keane writes. The company should also benefit from new services and products, including QR codes for in-store payments, which Keane describes as a “significant opportunity” not factored into revenue models. While PayPal is investing heavily, he sees margins holding up. The company planned $300 million in capital expenditures for the last six months of the year, but still expects operating margins to increase by 1 percentage point overall for 2020.
PayPal is also introducing installment payments for account holders, a market that could become a hit as PayPal offers the plans with no fees or interest rates — attracting both merchants and consumers. He adds that PayPal should benefit from increased use of its peer-to-peer app Venmo, as well as the launch of PayPal credit and debit cards for Venmo.
(SQ) has been a sizzling stock this year, gaining 144%. But Oppenheimer’s Jed Kelly sees more gains ahead of him. He upgraded shares on Thursday to an outperform rating with a target of $185 from recent prices around $153. He also raised sales and earnings estimates for 2020 and 2021.
The pandemic is “drawing a massive shift in digital commerce, forcing retailers to rapidly adopt omnichannel solutions,” writes Kelly, referring to retailers selling goods both in-store and online. “We see SQ’s two-way networks of sellers and consumers positioning the platform as a structural winner during the recovery to sustain high levels of growth over several years.”
Square’s addressable market is worth $160 billion, Kelly estimates. He expects the company to see increased payment volume through its increasingly popular cash app, which is being adopted by more consumers and merchants looking to digitalize sales. He sees Cash App’s gross profit increasing from $1 billion in 2020 to nearly $2.5 billion in 2022, a compound annual growth rate of 54%.
One headwind for Square, however, is that thousands of small businesses have been shut down during the pandemic — more than 164,000, according to data
with closures accelerating since July. That creates short-term revenue headwinds for Square, writes Kelly. However, he claims the company has “best-of-breed skills” with traders and positions the company for “outsized stock gains as economic activity normalizes.”
This isn’t a stock for value-conscious investors — it’s trading at 288 times estimated earnings for the next fiscal year. Undeterred, Kelly is basing his price target at a multiple of 17 times estimated 2022 sales. That’s a reasonable multiple, he writes, for a “structural winner” whose earnings are expected to grow 37% annually over the next few years. will rise.
write to Daren Fonda at [email protected]