PayPal (PYPL) - Get PayPal Holdings Inc Report stock tumbled Friday amid questions about the bottom-line benefits of a partnership with rival Visa (V) - Get Visa Inc. Class A Report that the two companies said would build their individual brands and give consumers more payment options.
"While the Visa agreement likely opens up more possibilities as it relates to partnerships and providing access to the physical point of sale, the ultimate impact to the financial profile of the company is likely to create a fair amount of uncertainty," Sanjay Sakhrani, a Keefe, Bruyette & Woods analyst, wrote in a note. KBW has an "outperform" rating on PayPal and a price target of $44.
The stock tumbled 7% to $37.27 on Friday, while Visa saw a slight increase of 0.47% to $79.16. The PayPal deal was viewed as a positive for San Francisco-based Visa since PayPal agreed not to push its customers to draw funds directly from a checking account rather than their cards. Another plus is that PayPal promised to provide additional "enhanced" data to Visa and its cardholders to ensure better communication between the companies.
PayPal said the agreement "removes the threat of any targeted pricing actions," creating more long-term certainty in Visa's fees as well as increased volume and other "economic" incentives that would benefit the company.
"Strategically, this is a good long-term deal for both parties, and should quell long-term model sustainability concerns for PayPal at the price of higher transaction-expense risk in the short-term," JPMorgan analysts wrote in a note. "History says it is better to partner with, than compete against, Visa."
Still, more clarity is needed on "how quickly incremental Visa volume" will supplement results, how PayPal will "offset higher operating costs under the deal," and "how incentives and fees were cut," JPMorgan analyst Tien-tsin Huang wrote. JPMorgan has an "overweight" rating on PayPal, with a price target of $44.
The deal will give San Jose, Calif.-based PayPal an edge in the $100 trillion digital payments market, CEO Dan Schulman said. Customers will be able to pay with Visa cards using PayPal's wallet as well as use their Visa debit cards to withdraw or move money from their PayPal and Venmo accounts to their banks.
"This deal has the potential to be transformative for PayPal, Visa and the industry," Schulman said on an earnings call. "We believe it provides us the flexibility and the capabilities to execute against our customer champion vision, to partner with issuers and others who share our vision, and to accelerate PayPal's in-store access in new and profitable ways."
Merchants and card-issuers will benefit from additional payment security, too. With PayPal joining Visa's Digital Enablement Program, which utilizes tokens to secure sensitive data, the company will be able to access Visa's contactless point-of-sale services.
"The partnership is designed to deliver significant benefits for Visa's issuing financial institutions, including a significantly better experience for their customers," Visa CEO Charles W. Scharf said on an earnings conference call.
On Thursday, Visa reported net income, including one-time charges related to the company's purchase of former subsidiary Visa Europe, that fell 76% to $412 million.
However, Visa's adjusted earnings of 69 cents a share for the three months through June, its fiscal third quarter, beat the 67-cent average of analysts' estimates in a Bloomberg survey. The payment network's operating revenue climbed 3% to $3.6 billion, in line with analysts' estimates, as cardholder spending climbed 10% to $1.3 trillion.
PayPal reported adjusted earnings of 36 cents a share, in-line with Wall Street estimates, on revenue of $2.65 billion, which beat analysts' expectations.
Despite that, the company didn't reiterate its "medium-term guidance" and faces potentially higher transaction costs in the next two years, making its outlook "murkier," Keefe Bruyette's Sakhrani wrote.