PayPal Holdings Inc. (NASDAQ: PYPL) shares saw a slight bump up on Thursday following an incredibly positive analyst report. Nomura Instinet was the firm on the call, and this was a very glowing report, considering the relatively slow 2018 that PayPal has seen.
Nomura Instinet issued a Buy rating with a $100 price target, implying an upside of 28.5% from the most recent closing price of $77.82.
PayPal shut up the bears in 2017, rising about 87%, but the stock lost some of its luster in early 2018 after the company announced that it was exiting its operating agreement with eBay, reigniting bearish sentiment. In 2018 alone, PayPal is only up about 6%.
After a strong 2017, shares have been range-bound most of this year, as the benefit of positive EPS revisions has been largely offset by multiple compression that started with the eBay breakup at the end of January.
Since then, headlines about the payment networks planning a common checkout button and Amazon’s decision to offer discounts to merchants that adopt Amazon Pay have further pressured shares, but Nomura expects the upcoming investor day to serve as a positive catalyst and highlights three focus areas that it thinks will reignite investor enthusiasm:
- Operating Margins. We believe PAYPAL is in the early stages of a multi-year cycle of operating margin expansion, which combined with mid-20% TPV growth and mid-teens revenue growth, will enable it to deliver >20% annual EPS growth over the next five years—that’s faster growth than we expect from Visa and MasterCard. We estimate that PayPal’s incremental operating margins are 33%, meaningfully higher than its current operating margins (hovering in the low-20% range in 2017). By our math, each 50bps of margin improvement would lift EPS by 2%.
- Capital Actions. PayPal enjoys a hallmark of truly great businesses: the ability to invest for growth, while simultaneously returning capital to shareholders. Buybacks, which enable remaining investors to enjoy more of the upside associated with future share appreciation, are an important part of PayPAl’s long-term growth trajectory, in our view, and we expect its share count to gradually decrease with the passage of time, providing a persistent annual EPS tailwind of 1% (net of ongoing employee share issuances).
- Life After eBay. Investors are hungry for mitigation strategy details, including potential partnerships that PayPal will be free to enter into post OA.
Shares of PayPal were last seen up more than 1% at $79.01, with a consensus analyst price target of $85.05 and a 52-week range of $48.89 to $86.32.