PayPal sells U.S. credit assets, stock hits record high
PayPal Holdings Inc. shares closed at a record high Thursday after the company announced the sale of its $ 5.8 billion U.S. credit portfolio, and executives told investors that it expected to earn more profit on higher sales than the company previously expected.
Investors sent shares up 5.8% during the regular session to a record close of $ 77.70. PayPal PYPL, -1.70% stock has nearly doubled far this year, gaining 97% as the S&P 500 index SPX, -0.26% has climbed 15.5%. Since investors pressured former parent company eBay Inc. EBAY, -0.11% to spin off the company in 2015, the stock has gained 124%.
Billed as a partnership between PayPal and Synchrony Financial SYF, +1.44% , the credit deal will span 10 years and mean Synchrony will purchase billions of its U.S. credit-receivables assets—money owed by consumers who have taken out credit lines with PayPal—and become the exclusive issuer of PayPal Credit online in the U.S.
“Credit is an important part of our business,” PayPal Chief Financial Officer John Rainey said on a call with analysts early Thursday. “It increases consumer engagement, attracts merchants to our network, and complements the holistic suite of payment offerings on our platform. But we are not a credit company.”
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Rainey said on the call that the deal allows PayPal to continue to earn revenue through its credit business via a profit-sharing agreement with Synchrony while reducing its credit exposure. The most important aspect of the deal, Rainey said, was that it frees up “about $ 1 billion a year going forward for other capital allocations, without compromising earnings growth.”
PayPal has historically spent between 40% to 50% of its free cash flow to fund the credit business.
Executives said that the deal took most of 2017 to put together and will let the company essentially use Synchrony’s balance sheet to grow its credit business.
Read: ‘Pay with Venmo’ optimism sends PayPal to record high
On the call with analysts, Rainey also issued an increased fourth-quarter revenue forecast for earnings of 52 cents to 59 cents a share on revenue of $ 3.64 billion to $ 3.7 billion. Previously, executives had forecast earnings of 37 cents to 39 cents a share on sales of $ 3.57 billion to $ 3.63 billion.
Of the 46 analysts who cover PayPal, 32 have buy or overweight ratings and 14 rate the stock a hold, according to FactSet. Two analysts raised price targets on Thursday and the average price target is $ 76.64, according to FactSet.