PayPal – Will This Online Payment Giant Falter?

Paypal is creating new agreements, extending existing partnerships, and looking to monetize Venmo. What could this mean for investors?

paypal, pypl


PayPal Holdings, Inc. is an American company operating a worldwide online payments system that supports online money transfers and serves as an electronic alternative to traditional paper methods like checks and money orders.


I became interested in PYPL recently after how well their earning for 1Q was. Some of the highlights from their earning report and calls are listed below:

  • The revenue grew 17.3% YoY from 2.54 billion to 2.98 billion.
  • The net income from continuing operation increased by 5.2% from 365 million to 384 million.
  • They reported an EPS of 0.44 compared to the expected of 0.41.
  • Operating cash flow of 751 million and free cash flow of 603 million.
  • Net income was 384 million, up 5% YoY.
  • Added 6 million new active accounts, which represents a 35% increase YoY. The Q1 account “adds” are significant because they’re the single best indicator of PayPal’s revenue potential. It’s understandable for the rate of new PayPal customers to slow as the company matures. Yet active customer add have now averaged 11% annualized growth for the last six quarters.
  • Reported 32 transactions per active account, increase 12% YoY. PayPal ended the quarter with 203 million active customer accounts, and 16 million merchant accounts.
  • Total payment volume (TPV), a measure of the total dollar volume of payments PayPal facilitates, rose 23% over the prior year quarter, to $99 billion.
  • PayPal continues to scale its mobile transactions. During the quarter, 32% of TPV occurred through mobile devices, and mobile TPV rose 51% to $32 billion.
  • Venmo, the company’s social payments app, recognized $6.8 billion in TPV during the quarter — a nearly 113% increase over Q1 2016.
  • During the quarter, PayPal announced an agreement with Wells Fargo, which allows Wells Fargo debit and credit card holders to use PayPal to make contactless in-store payments. PayPal also extended its relationship with Google, adding PayPal as a payment method in Android Pay for online, in-store, and in-app payments. PayPal already has partnership with Visa, Mastercard, Discover, Citi, Facebook, and some others.
  • Transaction take rate, which is the percentage of revenue PayPal records per transaction it facilitates, declined 14 basis points from the prior year quarter, to 2.62%. This is due to a higher percentage of Venmo person-to-person payments, on which PayPal doesn’t generate revenue.
  • PayPal’s take rate has declined since 2015 as it processes a higher percentage of payments through its Braintree subsidiary (which has a higher transaction expense than the overall company). However, over the last three quarters, PayPal’s take rate appears to have stabilized in a range of between 2.62% and 2.65%.
  • PayPal pending purchase of TIO Networks Corp is on track to close in the second half of 2017. The acquisition of the kiosk payment vendor will give PayPal broad access to “unbanked” customers in North America.
  • PayPal repurchased $517 million of its own shares during the quarter. It also announced that its board has authorized a massive $5 billion share repurchase program, to begin once the 2016 share repurchase program, with $488 million of authorization remaining, is completed.

The management has enough confidence after 1Q earning to raise its 2017 outlook. They expect the revenue to be between 12.52 and 12.72 billion, an increase from 12.45 to 12.65 billion. The EPS is expected to be between 1.28 and 1.33 compared to 1.26 and 1.31.

Paypal’s Plans

PayPal is looking to monetize Venmo so it can generate revenue. Right now Venmo is only used to make payment between friends, but PayPal opened the beta for select PayPal merchants to be able to accept Venmo as a payment option, calling it “Pay with Venmo”. PayPal also mentioned that the investments they’ve made in their platform architecture now allow them to enable Venmo as a payment method for their PayPal merchants without any additional integration work on their end, mirroring the approach they used to successfully roll out One Touch. One Touch was PayPal most successful launch ever. One of the factors that Schulman and others in PayPal leadership believe significantly contributed to this successful launch is that it requires no effort on the part of merchants to accept the new platform.

This means that PayPal won’t have to approach individual retailers about incorporating Venmo into their checkout processes. Because PayPal is able to build Pay with Venmo on top of its core infrastructure, merchants who currently accept PayPal will be able to automatically accept Venmo as well. Even better, management is actively looking for ways to monetize the Venmo experience beyond having the platform used for retail transactions, of which PayPal gets a cut. Earlier this year, PayPal COO Bill Ready admitted that some merchants like Papa John had already approached PayPal about advertising on Venmo. Given its potent combination of social media-like characteristics and payments, this could potentially be a real source of revenue for Venmo in the years ahead.

DISCLAIMER: I do not hold any position in PYPL currently. I plan on opening a long position in PYPL in the near future. I believe that PYPL has great growth potential once it can generate revenue from Venmo. Please do your own research before making any decisions. Don’t make decisions based solely on the information provided here.

Update: June 7, 2017

Yesterday, Apple released some news regarding P2P payment. Apple will include a feature for Apple Pay in their upcoming iOS 11 set to be release in the fall. The feature will allow iOS users, which include: iPhones, iPad, and Mac to be able to request money and pay friends money or peer-to-peer payment through iMessage. The money will be stored in an Apple Pay account similar to Venmo like. Right now, you can connect Venmo to do that with iMessage also. Apple has not say if this service will be free or users will have to pay and also did not comment if they will continue supporting the feature with Venmo right now. They are incorporating this to compete with Venmo and increase Apple Pay usage since it has not been that great.

I can see this cutting down on Venmo users which will cut down in PayPal revenue, but I still see a revenue increase for PayPal since they are not generating any from Venmo currently. Venmo will still be the main P2P platform outside of iOS, but I can see iOS users moving away from Venmo if the Apple Pay feature is free and easy to use.

TLDR; PayPal is a little bit riskier now with more competition from Apple, but I still see some growth in them when they start making money from Venmo.

Update 2: June 26, 2017

The banks released their own version of P2P payment called Zelle. This is the banks second attempt at P2P payment system with the initial release back in 2011 called clearXchange. That never picked up any traction and the banks are hoping for it to be better this time around. Zelle is backed by more than 30 banks at the moment, including Bank of America, Chase, Wells Fargo, and Citi. Zelle’s pitch to the people is that it is the fastest form of P2P system out there (imagine the old Chase quick pay system). By using Zelle to transfer money, you’ll receive your money instantly instead of waiting a few days to transfer from a 3rd party app like Venmo or PayPal to your bank account. PayPal counter this with introducing its own instant transfer, but this will cost 0.25 for each instant transfer. This feature is not yet on Venmo, but PayPal is saying it will eventually expand it to Venmo also. This has potential to cut down on PayPal and Venmo usage since it will be more convenient to use Zelle to get instant money, but Zelle do not have a stand alone app at the moment. You have to use Zelle through the banks website. You also can’t use Zelle to pay merchants online like you can with PayPal and soon Venmo. I still believe in PayPal to do well because it is currently not generating any revenue from Venmo at the moment. When PayPal can finally generate revenue from Venmo, I feel that it will be a huge boost. I am not the only one to think that. Recently, investment banker Pacific Crest upgraded PayPal to overweight with a price target of $60 and today BTIG raised PayPal price target to $63.

However, with more competition than ever before, PayPal needs to be realistic with their guidance. If they set it too high and are unable to match it, then it could spiral downward.

Update July 15, 2017: Paypal announced a partnership with Apple.  More details can be read here.