Shares of PayPal (PYPL) are sliding after the company reported earnings last night and announced a strategic agreement with Visa (V). Wells Fargo analyst Timothy Willi downgraded PayPal shares on the heels of the news, specifically citing concerns over the company's new partnership deal, which he believes may result in "some interim pressure" on funding costs and operating margins. Conversely, Wedbush analyst Gil Luria told investors that the announced agreement creates "unprecedented upside" for PayPal.
VISA PARTNERSHIP: PayPal and Visa announced yesterday a strategic partnership to expand their relationship. PayPal will gain access to Visa's tokenization services, starting in the U.S., for in-store PayPal transactions. This will expand acceptance for PayPal's digital wallet to all physical retail locations where Visa contactless transactions are enabled. The partnership's benefits will include greater accessibility and volumes for Visa payment instruments in the PayPal digital wallet.
DEAL COMES "AT A COST": While the company's second quarter was better than expected on "many fronts," Wells Fargo's Willi downgraded PayPal to Market Perform from Outperform this morning, saying the announced partnership with Visa may result in "some interim pressure" on funding costs and operating margins. Furthermore, the analyst believes that upside earnings revisions and expanding valuations are now less likely as investors assess the timing of an inflection point when the benefits of the new deal may offset the likelihood of higher funding costs. Also bearish on PayPal, Piper Jaffray analyst Jason Deleeuw said he believes that the company's agreement with Visa increases the likelihood of a "meaningful shift" of PayPal's Automated Clearing House, or ACH, funding mix to Visa debit/credit. The analyst noted that currently about half of PayPal's funding is with ACH, and estimated that every 1% shift from ACH to debit and credit transactions will result in a 1c-2c headwind to annual earnings. Any potential revenue benefits to PayPal from the agreement will be longer term opportunities, the analyst told investors. He reiterated an Underweight rating and a $34 price target on PayPal's shares.
"MYRIAD" OF BENEFITS: On the other side, Wedbush's Luria believes this deal creates "unprecedented upside" for PayPal, bringing a "myriad" of benefits, including the removal of threats from Visa and banks, the removal of additional fees, and the ability to obtain volume incentives. He reiterated an Outperform rating on PayPal's stock and raised his price target on the shares to $50 from $47. Stephens analyst Brett Huff is also bullish on the partnership. The analyst told investors in a separate note that he remains a buyer of PayPal as the positives of the second quarter outweighed the negatives. Besides the revenue beat and the company's raised 2016 guidance, he identified the boost he expects the Visa deal will give the company's in-store payments initiative and the increased long-term revenue opportunity due to higher engagement from payment choice as some of those positives. He reiterated an Overweight rating and $45 price target on PayPal's shares.
PRICE ACTION: Near noon, shares of PayPal had dropped about 7% to $37.31, while Visa, which also reported earnings last night, was fractionally up to $79.23 per share. [Closing prices: PYPL $37.42; V $79.91]
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