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What will PayPal Do With Its Cash Pile?

Posted on Wednesday, Aug 1st 2018

PayPal (NASDAQ: PYPL) recently reported a strong quarter that topped estimates but its revenue outlook missed estimates.  

PayPal’s Financials

For the second quarter, PayPal reported revenue of $3.86 billion, up 23%. GAAP EPS was up 29% to $0.44 and non-GAAP EPS increased 28% to $0.58. Analysts were expecting earnings of $0.57 on revenue of $3.81 billion.

During the quarter, 7.7 million active accounts were added, with net new active accounts up 18% to reach 244 million. It recorded 2.3 billion payment transactions, up 28% and $139 billion in total payment volume (TPV), up 29%. Person-to-Person (P2P) volume grew 50% to more than $33 billion and represented approximately 24% of TPV in the quarter. Venmo, the company’s social payments platform, processed more than $14 billion of TPV, growing 78% over the same period last year.

Driven by strong mobile engagement on its platform, PayPal processed approximately $54 billion in mobile payment volume, up 49%. In the quarter, mobile payment volume represented 39% of overall TPV.

For the third quarter, PayPal expects revenue to grow 12%-13% to $3.62-$3.67 billion. GAAP EPS is expected in the range of $0.31-$0.34 and non G-AP EPS is expected in the range of $0.53-$0.55. Analysts were expecting revenue guidance of $3.71 billion.

For the full year, PayPal raised its revenue and non-GAAP EPS guidance. It expects revenue to grow 17%-19% to $15.3-$15.5 billion. GAAP earnings per diluted share is expected in the range of $1.44 – $1.51 and non-GAAP earnings per diluted share in the range of $2.32 – $2.35.

PayPal’s Acquisitions

During the quarter, PayPal announced four strategic acquisitions.

In May 2018, PayPal announced the acquisition of Swedish mobile payments company iZettle for approximately $2.2 billion in cash, roughly double the expected valuation through a planned IPO. While PayPal is used by major retailers around the world, including Walmart and Best Buy, iZettle is focused more on small-to-medium-sized firms. With the acquisition of iZettle, PayPal plans to expand its in-store presence.

Also in May 2018, PayPal announced and closed the acquisition of AI-powered prediction platform Jetlore for approximately $16 million in cash. PayPal acquired Jetlore to accelerate PayPal Marketing Solutions.

In June 2018, PayPal announced the acquisition of payout platform Hyperwallet for approximately $400 million in cash. With the acquisition of Hyperwallet, PayPal plans to enhance its payout capabilities, improving its ability to provide an integrated suite of payment solutions to e-commerce platforms and marketplaces around the world.

In June 2018, PayPal also announced the acquisition of adaptive fraud prevention solution Simility for approximately $120 million in cash. PayPal acquired Simility to enhance its ability to deliver fraud prevention and risk management solutions to merchants globally.

In July 2018, PayPal also announced the closing of the sale of its consumer credit receivables transaction with Synchrony for $7.6 billion. It also entered into an expanded agreement to collaborate with Synchrony Bank to expand PayPal’s consumer credit offerings.

PayPal’s cash, cash equivalents and investments totaled $6.3 billion as of June 30, 2018. During the quarter, the company repurchased 6.1 million shares of common stock, returning approximately $500 million to stockholders. Its board of directors has also authorized a new stock repurchase program, under which the company may repurchase up to $10 billion in outstanding common stock, double its previous stock repurchase program, of which $2.7 billion is still available.

Questions for the Paypal Board

PayPal seems to be plush with cash. It reportedly is ready to invest $3 billion per year on acquisitions to add specific capabilities. The online payment space is getting quite crowded with competing platforms from Google, Apple, Amazon, Alibaba-backed Ant Financial, Square, Skrill, Payza, and Stripe. PayPal seems to be taking the acquisition route to compete with them. What is next on its radar? In particular, what is on the radar for India and Africa where online payments are projected to grow tremendously. Indian online payment market is expected to increase five-fold to $1 trillion by 2023 while the Africa and Middle East market is expected to reach $78.3 billion by 2022.

Paypal’s stock is trading at $82.39 with a market cap of $102.04 billion. Its 52-week range is $92.35-$57.58.

 

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