PayPal (PYPL) is getting slaughtered today (-12%) on what I continue to maintain was a solid quarter. There is one metric that bears are hanging their hats on: Transaction Margin.
Transaction Margin came in at 45.9% for the quarter – down from 47.1%, 49.7%, 51.0% and 48.7% in the previous four quarters. (You can view these numbers on page 14 of their earnings report). What does it mean? Transaction Margin is what PYPL takes from each transaction after subtracting transaction expenses and transaction and credit losses. Since the latter two were stable in the quarter, what this adds up is that PYPL is getting less price for each transaction. Perhaps this is a function of increased competition. I really don’t know but I’ll be looking to find out in the days to come since it is a concern.
Nevertheless – bigger picture – PYPL met guidance and reported a good overall quarter as I argued in yesterday afternoon’s blog. After today’s drop, the stock is now trading at 13x current year EPS guidance. That is insanely cheap for a company of this quality. So while I’m concerned about the declining Transaction Margin and what it might mean, I continue to think that it’s more than priced into shares at this point. As a result, I added to my position this morning.