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New Products and Tie-ups Help PayPal Grow

Posted on Wednesday, Oct 24th 2018

PayPal (NASDAQ: PYPL) recently reported its third quarter results that surpassed all market expectations as it continues to grow rapidly through strategic tie-ups and the launch of newer products.

PayPal’s Financials

PayPal’s revenues of $3.68 billion, grew 14% over the year, and were ahead of the Street’s forecast of $3.66 billion. Non GAAP EPS of $0.58 up 26% y-o-y and $0.04 better than the market’s estimate for the quarter.

By nature of services, PayPal’s transaction revenues grew 17% to $3.34 billion, accounting for nearly 91% of its quarter’s revenues. Other value added services accounted for the remaining 9% of the revenues and fell 11% over the year to $340 million. The decline in the segment was attributed to the sale of its US consumer credit receivables portfolio to Synchrony for $7.6 billion.

PayPal’s revenues from the United States grew 13% over the year to $1.96 billion, and international revenues grew 15% to $1.72 billion.

Among key operating metrics, PayPal recorded a 15% growth in total active accounts. It added 9.1 million net new active accounts during the quarter, taking the total number of active accounts to 254 million, ahead of the market’s forecast of 251 million. The total number of payment transactions grew 27% over the year to 2.46 billion, which was also ahead of the Street’s estimate of 2.43 billion. PayPal’s payment transactions per active user grew 10% to 36.5 million. Total Payment Volume grew 24% to $143 billion in the third quarter with Venmo accounting for $17 billion of the figure during the quarter. During the quarter, PayPal processed $57 billion in mobile payment volume, recording a 45% growth over the year.

For the current quarter, PayPal expects revenues of $4.19-$4.27 billion, compared with the market’s forecast of $4.22 billion. It forecast non GAAP EPS of $0.65-$0.67 for the quarter, compared with the Street’s estimate of $0.65. PayPal expects to end the year with revenues of $15.42-$15.5 billion with an EPS of $2.38-$2.40. The Street was looking for revenues of $15.43 billion with an EPS of $2.35 for the year.

PayPal’s Growing Partnerships

During the quarter, PayPal continued to expand its market presence through significant strategic tie-ups. Earlier this month, it announced an expansion of its partnership with American Express that will allow cardholders to use their Membership Rewards points when shopping from PayPal merchants. PayPal has similar agreements with other card providers including Visa and MasterCard. The agreement will also allow Amex mobile users to transfer funds directly through PayPal or Venmo, and to add their American Express cards to their PayPal wallets. PayPal will allow users to pay their American Express card bills through its app as well.

PayPal is also expanding its presence in the brick and mortar world. Recently it also entered into an agreement with Walmart that will allow PayPal customers to withdraw cash from Walmart stores after paying a withdrawal fee of $3. This will be the first time that PayPal will allow its customers to make such withdrawals. PayPal is counting on Walmart’s massive geographic reach to bring this additional value to its customers.

Venmo’s Growth

PayPal has managed to stay relevant in today’s market through the continuous improvement of its mobile offerings with Venmo being its latest success story. PayPal has two key Venmo offerings – Pay with Venmo and the Venmo debit card. Pay with Venmo allows Venmo users to make online purchases. It saw monthly active user (MAUs) grow 185% from August to September. The Venmo debit card, which was launched in June, also saw significant growth with MAUs growing 320%. Overall, the transaction volume on Venmo’s service grew 78% to $16.7 billion and reached an annualized run rate of nearly $70 billion. Last month, PayPal processed more than $1 billion in instant transfer volume on the Venmo platform alone.

During the last quarter, PayPal recorded Venmo monetization – the number of users that tried a monetized Venmo product – grow to 24% compared with 13% in May this year. The rapid adoption is attributed to the launch of the Venmo Debit card and the release of Smart Payment Buttons for vendors. Smart Payment Buttons allow merchants to dynamically populate a list of checkout methods for customers based on data that PayPal has on each customer and their location. For instance, if a user has a Venmo account, they will see a Pay with Venmo button whereas those who don’t have a Venmo account won’t see it. PayPal believes that The Buttons are delivering a better checkout experience for consumers and driving monetization of its Venmo users.

While Venmo may be attracting several users, it is still to turn into a profitable venture for PayPal. PayPal does not collect a percentage on the peer-to-peer payments that are processed through Venmo. PayPal is hoping to make up for this revenue through the release of ancillary services like instant transfers.

Venmo’s biggest competitors in the space are Square and Zelle. Analysts believe that the US peer-to-peer mobile payments market will grow from $156.5 billion in 2018 to $244 billion by 2021. According to eMarketer, Zelle will be a clear leader in the segment in the next few years.

PayPal is looking to counter the competition through acquisitions. It had earlier announced the $2.2 billion acquisition of Sweden-based iZettle. The acquisition of the mobile payments company will help Venmo grow in the international markets.

I would like to know from the users to rate the app that they like most when it comes to mobile peer-to-peer transfer. Do you prefer Zelle, Square or Venmo, and why?

PayPal’s stock is trading at $85.43 with a market cap of $100.6 billion. It touched a 52-week high of $93.70 in September this year. It has recovered from a 52-week low of $68.61 nearly a year ago.

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