We continue to like the long-term potential at Visa and absolutely love the level of its operating margins. Facebook is going to continue to get bad press, but fundamentally, we think the company is going to make it through to shine once again. PayPal had a nice first-quarter report, and while we would like to see more security with respect to its relationship with eBay, the company’s pace of growth suggests it could easily grow out of its early ties with the auction website.
By Brian Nelson, CFA
There were three notable reports after the close April 25: Visa (V), Facebook (FB), and PayPal (PYPL).
We continue to be huge fans of Visa’s long-term potential, and its level of operating margins may be the best in our coverage universe. As with its brother Mastercard (MA), the company benefits from an ever-strengthening network effect, something that can’t be unseated easily by any new payment provider. Visa’s fiscal second-quarter 2018 results were solid. Net operating revenue advanced 14% at Visa, as it experienced double-digit growth in payments volume (+11%), cross-border volume (+11%) and processed transactions (+12%). Adjusted net income leapt 26% on a year-over-year basis during the period, while adjusted earnings per share jumped 30%. It is business as usual at Visa, and while we’d like the company to work toward a net cash position, we continue to be mighty pleased with its quarterly performance.
Facebook delivered in its first quarter of 2018. The social media behemoth has been under Congressional scrutiny as a result of the Cambridge Analytica fiasco, and while new regulations may be around the corner for those aggregating valuable consumer data, we don’t think Facebook investors have much to worry about over the long haul. During the first quarter, advertising revenue at Facebook jumped 50%, and it leveraged that top-line expansion into 64% operating income growth, with the company’s operating margin expanding ~5 percentage points on a year-over-year basis. Free cash flow came in at $5 billion during the first quarter, a huge leap from the $3.8 billion in the year ago period, while the company ended the period with $44 billion in total cash and no debt. Facebook may face some negative press in coming months, but its fundamentals are as strong as ever.
We were a bit concerned when eBay (EBAY) said it is likely going to discontinue its agreement with PayPal early next decade (2023), and while it surprised many, our analysis indicates that the loss of payments volume at eBay amounts to just a matter of months of organic growth at PayPal. We’d like for the two companies to work things out, but an agreement between the two isn’t necessary for our long-term thesis on PayPal, though we certainly would like it. PayPal’s first-quarter 2018 numbers were fantastic, as expected. Revenue advanced 22% on a currency-neutral basis, and the company was able to leverage that growth into 29% non-GAAP earnings-per-share expansion. Adjusted free cash flow came in at $733 million during the first quarter of 2018 versus the $603 million mark in the prior-year quarter.
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Brian Nelson does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.