Image source: PayPal.
PayPal (PYPL +2.48%) stock is firing on all cylinders this year. Shares of the digital-payments leader have gained more than 20% over the past 12 months. An image is worth a thousand words, and the following five charts explain the main drivers behind this impressive performance from PayPal.
It all starts with payment volume
Total payment volume, or TPV, shows the dollar value of payments processed over a specific period. For PayPal to deliver sustainable growth in revenue and cash flows, the company needs to keep TPV expanding over time.
PayPal registered $86.2 in TPV during the second quarter of 2016, growing 28% year over year in U.S. dollars and increasing 29% in constant currencies. Payment volume at PayPal's social payment platform, Venmo, grew 141% to $3.9 billion.
Image source: PayPal.
Mobile volume is particularly important in the payments business, and PayPal is rapidly expanding in this area. The company processed $24 billion in mobile payments transactions last quarter, a 56% increase versus the second quarter of 2015. The mobile segment currently represents 28% of the company's total payment volume, growing from 26% in the first quarter of 2015.
Competition in mobile payments is rapidly increasing. Competitor Square (SQ +1.88%), which is deeply focused on mobile, processed $12.5 billion in gross payment volume during the second quarter, growing by 42% year over year. Total net revenue at Square was $439 million during the period, a 41% increase versus the second quarter in 2015.
Apple (AAPL 0.87%) is another big competitive threat in mobile, considering the company's brand power and massive installed base of over 1 billion iPhones sold. Apple doesn't disclose payment volume for Apple Pay, but management said in the most recent conference call that Apple Pay is now accepted at over 3 million locations in the U.S., and the platform is now live in nine markets.
In spite of this growing competitive pressure, PayPal is gaining speed in mobile. The 56% increase in mobile volume the company registered in the second quarter of 2015 represents an acceleration over a 45% increase in the first quarter of 2015 and a 54% increase in mobile payments during the first quarter of 2016. This is arguably showing that the mobile payments industry is offering enough room for multiple players to expand at the same time, and PayPal seems to be handling the competition well.
Growing users and engagement
Payment volume is undeniably important, but it doesn't really tell the whole story. To measure how deep and sustainable this growth is, we need to consider additional metrics regarding users and engagement. Fortunately for investors, key indicators in this area are also moving in the right direction.
The company ended the second quarter with 188 million net active accounts, an 11% year-over-year increase, and 19 million new accounts over the past 12 months. Active merchant accounts stand at 14.5 million, as PayPal signed new partners such as Ikea in several countries and Carnival Corporation last quarter.
Image source: PayPal.
Customers are increasingly active on the platform. PayPal processed 1.4 billion transactions last quarter, jumping by 25% over the second quarter in 2015. Transactions per active account grew 13%, from 26.1 in the second quarter of 2016 to 29.4, a historical record for the company.
Image source: PayPal.
Sales and cash flows
The main operating indicators are delivering sound performance, and management is effectively translating that growth into increasing revenue and cash flow for investors. The company produced $2.65 billion in revenue last quarter, growing 15% in U.S. dollars and increasing 19% in constant currency terms.
In a sign of confidence, management raised revenue guidance for 2016 last quarter. The company is expecting revenue in the range of $10.75 to $10.85 billion, an annual increase of 19% to 20% in constant-currency terms.
Image source: PayPal.
PayPal is aggressively investing for growth, and the company has recently signed collaboration agreements with Visa (V +1.23%) and MasterCard (MA +1.76%), which will probably hurt PayPal's margins on transactions. Overall profit margins and cash flows could thus be volatile in the coming quarters.
Nevertheless, the business is still quite solid in this area. Free cash flow amounted to $405 million last quarter, growing 27% versus the second quarter in 2015 and amounting to 19% of revenue during the period. Management believes the company is well on track to producing over $2.1 billion in free cash flow for 016.
Image source: PayPal.
PayPal is doing quite well in terms of payment volume, users, and engagement. In addition, the company is delivering vigorous sales growth and healthy cash flows for investors. With this in mind, it's really no wonder PayPal stock has been producing market-beating returns lately.
