PayPal's (PYPL) fourth-quarter earnings beat estimates, but guidance was"conservative," says Wedbush Securities Managing Director Moshe Katri. He says results were "a bit better than feared," though upside earnings contrasted with light forecasts. Per Katri, investors must "wait and see" what's driving the cautious outlook.

Katri notes competitive unknowns, asking what PayPal is doing on "innovation" against rivals like Apple Pay (AAPL). As Katri states, PayPal must "build up that ecosystem" in terms of products and services, to "cross-sell" and deepen monetization.

However, he notes PayPal suffers from an "execution issue," and not a "structural issue, problem." With a "robust consumer banking" unit, Katri sees PayPal's potential if it focuses on executing monetization. Despite muted guidance, he keeps an Outperform rating on solid underlying fundamentals.

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Editor's note: This article was written by Angel Smith

Video Transcript

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- PayPal shares slightly lower here after the company reported fourth-quarter earnings, though, it beat on revenue and the bottom line in its latest quarter. Company's full year profit forecast falling below consensus. Here with us to discuss is Moshe Katri, Wedbush Securities Managing Director Equity Research.

Moshe, it's good as always to see you. Let me just get your take on the print here, Moshe. What do you make of it, the stock is sliding here a bit in the after hours, though we're off the low?

MOSHE KATRI: Let's say that the quarter is probably a bit better than feared. They beat on revenues, EPS, volumes look, TPV looks better. Take rates and operating margins, which have been both kind of areas of concern, did better than expected. Guidance seems to be pretty conservative. Q1 seems to be impacted by FX for the year. We'll have to wait and see what's driving the lower than expected guide.

The narrative here continues to be, what's Paypal doing on a competitive landscape? And how are they fairing versus people like Apple Pay? And then you have the other issue that they have to deal with, which is the volume mix.

Volume mix has impacted take rates in the past few quarters. And at this point, I think the change in the narrative, I think in the investor base needs to see what the new CEO plans to do. How do you offset the volume mix issue? And what sort of innovations the company plans to focus on in order for their competitive position to change here?

- And Moshe, on that front, there were some disappointment around the announcements that the company recently made perhaps because it built them up quite a bit before it made them. So if that's not it or was there anything in those announcements that you did think was a positive step, and what more on that front is needed?

MOSHE KATRI: I think, it's a show me story. It's more than just coming out and saying that's what I'm going to do, I think people want to see this reflected in the margins and take rates. They waited for a couple of years and hasn't happened. I think at this point, there's a fair amount of skepticism out there that this new management team can get to that change.

The good news is that you are seeing a very, very sticky merchant kind of platform at Paypal. 30 million plus merchants, they love the product. The Paypal button has probably the highest conversion rates, that's a big deal. So merchants are sticking with it.

The challenge here for this management team is to build up that ecosystem of products and services to cross-sell into that merchant base. And I think the new CEO will be focusing, given his background more on the SMB part of the business, which could be pretty profitable.

And then on the consumer side, I believe the reported 26 million active consumers. That's down about a million from the last time they reported it. But again, here, this is a very robust consumer banking kind of platform and they have to build that too. So it's all about monetization. And I think the market wants to see results before they buy into this.

- And Moshe, correct me if I'm wrong, but you have an outperform on this name, so equivalent of a buy. What are the catalysts ahead, most specifically that you see that make you bullish on it?

MOSHE KATRI: We like the financials. The company has almost $12 billion worth of cash and short-term financial instruments on the balance sheet. They're going to make about $5 billion free cash flows this year, stocks trading at 12, 13 times. This is not a structural issue problem. This is an execution issue. And if you're able to execute better, I think there's a lot of upside here in terms of earnings power.

- All right. Well, we'll see if that plays out, I'm really interested to listen to the call later, Moshe, and I'll be interested to read your note on that call as well. Thanks so much.

MOSHE KATRI: Thanks. Thank you.

- Take care.