Valuentum Exclusive Analysis for the Discerning Investor

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In this note, we cover how the ongoing COVID-19 pandemic is impacting two of the holdings within our Best Ideas Newsletter portfolio: PYPL and V.

By Callum Turcan

PayPal

On February 27, Best Ideas Newsletter portfolio holding PayPal Holdings Inc (PYPL) provided an update on its guidance for the first quarter of 2020. Management noted that the ongoing novel coronavirus (‘COVID-19’) pandemic (the World Health Organization upgraded COVID-19 to a pandemic on March 11, highlighting how serious of a situation this is) would reduce PayPal’s revenue growth on both a GAAP and non-GAAP basis by ~100 basis points versus previous estimates laid out on January 29, which were provided when the firm reported fourth quarter and full-year earnings for 2019. Back in late-January, PayPal noted:

PayPal expects revenue to grow 16 - 17% at current spot rates and 17 - 18% on an FX-neutral basis, to a range of $4.78 - $4.84 billion. PayPal expects GAAP earnings per diluted share in the range of $0.16 - $0.21 and non-GAAP earnings per diluted share in the range of $0.76 - $0.78.

As of late-February, PayPal is now expecting:

PayPal's business trends remain strong; however, international cross-border e-commerce activity has been negatively impacted by COVID-19. We currently estimate the negative impact from COVID-19 to be an approximate one percentage point reduction, on both a spot and foreign currency-neutral basis, to PayPal's year-over-year revenue growth for the first quarter, as compared to the revenue guidance provided on January 29, 2020.

Stronger performance quarter-to-date across our diversified business is partially offsetting this one percentage point negative impact. We now expect to report first quarter 2020 revenue towards the lower end of our previously guided range of $4.78 - $4.84 billion. We are reaffirming our first quarter 2020 GAAP and non-GAAP EPS guidance.

Given the severity of the situation has only increased since then, it’s likely PayPal’s full-year guidance will get modified as well. Management expects to provide a more detailed update on PayPal’s financial and operational performance this upcoming April during the firm’s first quarter conference call with investors.

We appreciate that PayPal’s strong operational performance is offsetting some of the headwinds created from the current pandemic. Please note that while the ongoing COVID-19 pandemic will pressure the price of most equities in the near-term, we remain very optimistic on PayPal’s long-term free cash flow growth outlook and will reiterate here that our fair value estimate for shares of PYPL stands at $125 per share. To read more about why we like PayPal, please check out this article here.

Visa

Pivoting to another Best Ideas Newsletter portfolio holding that’s also within the financial tech/payment processing space, Visa Inc (V) also provided an update regarding its guidance for fiscal 2020 (Visa’s fiscal year has historically ended in September) via an 8-K filing back on March 2. First, let’s look at the guidance Visa provided for its second quarter fiscal 2020 performance during its latest conference call with investors back in late-January:

“Helped by the extra day in a leap year, second quarter net revenue growth rates are expected to be in the low double digits and modestly better than the first quarter. Our second quarter revenue outlook does not reflect the potential effects of the recent coronavirus outbreak in China. It is too early to assess this impact.”

Here’s what the company had to say in its 8-K filling on March 2 (emphasis added):

Through February 28, 2020, the most significant impact has been on travel to and from Asia. This has resulted in a sharp slowdown of our cross-border business, in particular travel related spending in both card present and card not present. Cross-border eCommerce unrelated to travel has thus far not been significantly impacted, except in some Asian markets. In markets where Visa processes the majority of our transactions, domestic spending growth, both credit and debit, remains largely stable with the exception of some impact in Hong Kong and Singapore.

Cross-border growth rates have deteriorated week by week since the coronavirus outbreak in China, and trends through February 28, 2020 do not yet fully reflect the impact of the coronavirus spreading outside of Asia. As such, we anticipate that this deteriorating trend has not bottomed out yet. Because the situation remains fluid, it is not possible to accurately forecast the growth trend for the rest of our second fiscal quarter or the remainder of fiscal 2020.

Based on trends through the end of February, and assuming some continuing deterioration in March, Visa expects second fiscal quarter net revenue growth to be approximately 2.5-3.5 percentage points lower than the outlook we shared on our January 30, 2020 earnings call.

In fiscal 2020, Visa is guiding for its GAAP and adjusted (non-GAAP) constant-currency revenues to be up by the low double-digits, at least that’s how things stand today as of this writing. That may change given the slowdown in travel and vacationing we are witnessing worldwide, among other things. We are still optimistic on the long-term outlook for Visa’s free cash flow growth trajectory and our fair value estimate stands at $190 per share. Members looking to read more about Visa should check out this article here.

Concluding Thoughts

The ongoing COVID-19 pandemic is aggressively slowing down the global economy, and our team has been closely monitoring these events and providing updates as new information becomes available to our members (here’s one such article covering recent events in Italy). In the US, the Trump Administration is contemplating fiscal stimulus measures which we covered here, and recently the S&P 500 index (SPY) hit the top end of our target range which we covered here. There’s room for the S&P 500 index to fall materially lower, as the low end of our target range sits at 2,350. We hope our members, and the families and friends of our members, stay safe during these harrowing times.

Financial Tech Services Industry – MA MELI PYPL VRSK V

Banks & Money Centers Industry – AXP BAC BBT BK C DFS FITB GS HSBC JPM KEY MS NTRS PNC RF STI TCF USB WFC

Related: IYG, IPAY, IYF

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Callum Turcan does not own shares in any of the securities mentioned above. Visa Inc (V) and PayPal Holdings Inc (PYPL) are both included in Valuentum’s simulated Best Ideas Newsletter portfolio. Bank of America (BAC) is included in Valuentum’s simulated Dividend Growth Newsletter portfolio. Some of the other companies written about in this article may be included in Valuentum's simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.