After beating Q3 estimates and issuing solid guidance, PayPal Holdings Inc.'s (PYPL) shares are up 77% on the year and have more than doubled since the online payments leader split from eBay in mid-2015. While many factors contributed to this run-up, I think two are especially worth remembering -- both for their continued relevance to PayPal going forward, and their potential relevance to various other tech companies:
- Companies often execute better after breaking free of a larger, less focused company pursuing many different goals.
- When it comes to digital services, consumers have a strong tendency to stick with what they're familiar with and see all the time. Even if credible alternatives emerge.
PayPal's latest numbers show that those trends aren't merely allowing PayPal to fend off some formidable rivals, but for now accelerate its growth. The company reported Q3 revenue of $3.24 billion (up 21% annually) and adjusted EPS of $0.46, topping consensus analyst estimates of $3.18 billion and $0.43. The results were fueled by a 30% increase in total payment volume (TPV) to $114 billion, which topped a consensus estimate of $109 billion.
Q4 guidance, which could be conservative given PayPal's recent history, is for revenue of $3.57 billion to $3.63 billion (up 20% to 22%) and EPS of $0.50 to $0.52. Revenue guidance is favorable to a $3.57 billion consensus; EPS guidance, affected by a pickup in R&D and sales/marketing spend, is in-line with a $0.51 consensus.
In addition, PayPal forecast on its earnings call it would see TPV grow at a mid-to-high 20% clip in 2018, and that revenue and operating income would grow around 20%. The consensus was for TPV to grow 24% relative to what analysts forecasts for 2017 (those estimates should move higher now), and for revenue to grow 17% relative to the midpoint of PayPal's new 2017 sales guidance.
Shares rose 3.6% after hours to $69.70, and made new highs in the process.
Nearly all of PayPal's core top-line and user metrics showed improved growth in Q3 relative to Q2. In constant currency (CC), revenue growth improved to 22% from 20% and TPV growth to 29% from 26%. Payment transactions grew 26% to 1.9 billion, and transactions per active account (on a trailing 12-month basis) grew 9% to 32.8. And active customer accounts grew by 8.2 million sequentially to over 218 million, after having grown by 6.5 million Q2. PayPal now expects to add close to 30 million active accounts this year.
Also lifting EPS: Excluding "volume-based expenses" (transaction expenses and transaction/loan losses), PayPal's expenses only rose by 5% to $1.13 billion (35% of revenue). On the flip side, volume-based expenses grew by 33% to $1.47 billion (45% of revenue), as PayPal's deals with Visa Inc. (V) , MasterCard Inc. (MA) and other payment card firms lead a larger portion of transactions involving payment cards compared with PayPal funds.
In addition to e-commerce's continued share gains at the expense of bricks-and-mortar (comScore estimates the U.S. e-commerce market is growing 15%), PayPal's tremendous deal momentum with online merchants and service providers since splitting from eBay has much to do with its accelerating growth. Some of this stems from merchants being more willing to partner now that PayPal isn't attached to an e-commerce rival. Some of it is also due to the popularity of PayPal's One Touch service, which lets users check out without having to re-enter their login info and in doing so can lift conversion rates of mobile e-commerce traffic, as well as how the deals with payment card firms have driven sign-ups and yielded a better user experience when paying with a card.
But in light of how Apple Inc. (AAPL) and Amazon.com Inc. (AMZN) , each of which have hundreds of millions of active payment cards on file, have taken aim at PayPal with rival services that work well enough, one also can't overlook just how much PayPal's brand and mindshare -- both of which grow as deals are inked with more big-name merchants and partners -- are leading consumers to opt for PayPal by default even when other payment options are available. And that seeing a PayPal button is perhaps more likely to drive a transaction for a store or platform that a user hasn't made a purchase on before than any alternative.
Here, it's telling that PayPal struck a deal with Apple earlier this year for iTunes and App Store payments. Or that it has deals in place with Google for Google Play and Android Pay transactions, with Facebook for Messenger payments and the Shop pages within Facebook's app and with Nintendo for digital game purchases. Even when a major tech firm has a large platform with a "captive" audience, the firm often decided it's in its interests to make PayPal a payment option.
There should be some additional growth drivers over the next 12-to-18 months. Among them:
- The deals PayPal has inked over the last 12 months with major banks such as Bank of America (BAC) , JPMorgan Chase (JPM) and Citigroup (C) . Among other things, these deals allow bank card users to quickly link their accounts with their PayPal wallets, enable PayPal accounts to be set up from bank properties and allow rewards points to be applied to PayPal purchases.
- The launch -- set for the first half of 2018 -- of an Apple Pay/Android Pay-like service for retail stores that relies on the PayPal app. PayPal's payment card deals should allow the service to work wherever Visa, Mastercard and Discover cards are used, provided a retailer has a payment terminal containing an NFC reader.
- Efforts to more aggressively monetize the Venmo mobile payments platform. Earlier this week, PayPal announced over 2 million merchants supporting PayPal will now also support payments made via Venmo accounts. Venmo, whose growth to date has been fueled in large part by peer-to-peer payments, saw its payment volume grow 93% annually in Q3 to $9.4 billion.
If there is one major remaining threat to PayPal, it's Amazon's continued e-commerce share gains, since Jeff Bezos' company still doesn't support PayPal transactions on its site or apps. PayPal noted earlier this year that it has held talks with Amazon about a deal, but none has been announced to date.
On the other hand, there's still a lot of share that PayPal can take among online retailers not named Amazon, while also benefiting from the e-commerce market's growth and from its nascent bricks-and-mortar payment efforts. Especially when some rival services that many investors were nervous about don't look as menacing anymore.
By the way, PayPal's CEO has a pretty cool hobby:
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Editors' pick: Originally published Oct. 19.