Several wildcards will impact PayPal's Q3 earnings

While the digital-payment specialist should report strong results, these factors will impact the bottom line.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The second quarter was an uncharacteristic one for PayPal (NASDAQ: PYPL). The mobile payment provider delivered a solid quarter but lowered its full-year forecast, which spooked some fainthearted investors, who ultimately raced for the exits. Those who fled may have done so prematurely, as the longer term looks bright for PayPal.

Let's recap the company's second quarter, look at several factors that will play into the third-quarter results, and see what investors should expect when PayPal reports earnings after the market close on Wednesday, October 23.

Great quarter

PayPal reported Q2 revenue of $4.31 billion, up 12% year over year, slightly below analysts' consensus estimates but near the midpoint of management's guidance. The company generated adjusted earnings per share of $0.86, up 47% compared to the prior-year quarter and higher than the $0.70 forecast. This bottom-line result included a $0.14 per-share benefit from PayPal's portfolio of strategic investments (more on that below).

The payment processor added 9 million net new active accounts during the quarter, an increase of 17% year over year, closing out the quarter with 286 million customer accounts, up 28%. Engagement also improved, as transactions per active account over the previous 12 months climbed to 39, a 9% increase.

Finally, payment transactions soared to 3 billion, up 28% year over year, while total payment volume of $172 billion jumped 24%.

Some unanticipated challenges

PayPal lowered its full-year forecast, citing several factors that played into that decision.

The company entered into a commercial agreement and a $750 million strategic investment in MercadoLibre (NASDAQ: MELI), which included the integration of PayPal into the Latin American e-commerce providers marketplace, while also linking  their respective customers, allowing for peer-to-peer (P2P) payments and international remittances. PayPal saw the opportunity to deploy even greater capabilities than it originally envisioned, expanding the project beyond its initial scope. This resulted in unexpected delays but will inevitably yield greater benefits down the road. 

Additionally, PayPal's original guidance included the implementation of a number of price changes that the company decided to delay. On the conference call, PayPal CFO John Rainey pointed out that while the timing shifted by a few quarters, PayPal expected to "realize the full 100% of the benefit" from those changes in 2020.

Finally, the strong U.S. dollar will continue to act as a headwind regarding foreign-currency exchange rates and have a greater negative impact on revenue in the second half than PayPal previously expected.

The volatile stock market isn't helping

PayPal has invested in several other companies, and under generally accepted accounting principles (GAAP) rules, is required to include the changes in the value of these positions in its bottom-line results. This portfolio includes a $500 million investment in Uber Technologies and the aforementioned investment in MercadoLibre. The portfolio also includes an investment in privately held Viva Republica, a Korean fintech start-up, and the owner of the popular P2P payments app Toss.

When PayPal reported its Q2 earnings, the company said it expected to realize a $0.03 gain that was included in its Q3 guidance. Due to stock market volatility, the values of PayPal's strategic investment portfolio declined by $228 million as its stakes in Uber and MercadoLibre fell by 34% and 10%, respectively, during the third quarter. This will result in a $0.15 loss per share, rather than the 3% gain PayPal forecast. Investors should be prepared for this hit to the bottom line.

What the quarter could hold

For the upcoming third quarter, PayPal is guiding for revenue in a range of $4.33 billion to $4.38 billion, which would represent growth of between 18% and 19%. Analysts' consensus estimates are sitting near the midpoint of PayPal's range, at $4.35 billion. 

On the profitability front, PayPal forecast adjusted earnings per share in a range of $0.69 to $0.71. Keep in mind that this estimate doesn't include the unexpected decline in its strategic investment portfolio. For their part, analysts' estimates are clocking in at $0.65.

With all the moving parts that will make up the quarter, it's important for investors to focus on PayPal's operational performance -- which has been stellar -- and not get caught up in the additional "noise" that will accompany its financial results.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Danny Vena owns shares of MercadoLibre and PayPal Holdings. The Motley Fool Australia's parent company Motley Fool Holdings Inc. recommends MercadoLibre and PayPal Holdings. The Motley Fool Australia has recommended PayPal Holdings. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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