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3 Big Takeaways From PayPal's Fourth Quarter

By Daniel Sparks - Feb 7, 2018 at 11:06AM

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Sure, eBay plans to move on from PayPal. But PayPal's fourth quarter still gave investors several good reasons to be optimistic.

Last week, financial-technology company PayPal (PYPL -0.49%) announced its fourth-quarter results featuring a 30% year-over-year increase in revenue and a 57% boost to non-GAAP earnings per share. Both of these key metrics were ahead of management's guidance for the quarter, and as a nice bonus, both figures beat analyst expectations as well.

Of course, there's more to PayPal's fourth quarter for investors to mull over than these headline metrics. Here's a look at PayPal's accelerating active-account growth, Venmo's staggering growth, and how eBay's (EBAY 0.05%) multiyear plans to make Adyen its primary payments processor instead of PayPal will impact the fintech company.

A woman sends money with the PayPal app

A woman sends money with the PayPal app. Image source: PayPal.

eBay makes plans to ditch PayPal

Since their separation in 2015, eBay has become less important to PayPal's financial results with each subsequent year. But the online marketplace is still material to PayPal's results. This is why when eBay announced plans to make Adyen its primary payments processor by mid-2020 on the same day PayPal announced its fourth-quarter results, PayPal stock fell sharply.

Given the importance of eBay to PayPal's business, investors have good reason to be concerned. But concerns could be overblown. Here's some background to help investors digest this news:

  • Though Adyen will become eBay's primary payments processor by mid-2020, PayPal will remain a payment option through July 2023.
  • eBay accounted for 13% of PayPal's total fourth-quarter payments volume.
  • But eBay's importance to PayPal's financial results has been diminishing. In 2016 and 2015, eBay accounted for 16% and 19% of PayPal's fourth-quarter payment volume, respectively.
  • Revenue related to eBay increased 7% year over year in 2017, much slower than the 24% growth in merchants services revenue during the same period.

eBay is undoubtedly important to PayPal, but its importance has been decreasing -- and eBay looks poised to continue to become less vital to PayPal's results, which should help alleviate any negative impacts of the payment processor's transition away from the online marketplace.

Venmo's growth is exploding

Person-to-person (P2P) payments app Venmo continued to be a bright spot for PayPal. Though management is still in the early stages of monetizing the app, pay volume and engagement on Venmo are skyrocketing.

Venmo processed $35 billion worth of payments over the past 12 months, 97% higher than in 2016. The P2P social-payments platform processed $10.4 billion during the fourth quarter alone, up 86% year over year. 

Smartphone screen showing Venmo messaging

Venmo. Image source: PayPal.

Meaningful and fast-growing payment volume for Venmo may not show up in PayPal's financial results yet. But when PayPal ramps up monetization on Venmo, the P2P platform could morph into a major catalyst.

Accelerating growth in active customer accounts

PayPal added a record 8.7 million net new active customer accounts during the quarter. This brought total active customers to 227 million, up about 15% year over year. This notably marks an acceleration from the 14% growth PayPal saw in active customer accounts in its third quarter.

Impressively, this marked PayPal's fourth quarter in a row of accelerating year-over-year growth rates in active accounts.

Management said growth in active accounts was "primarily driven by our core PayPal business followed by strong growth in Venmo accounts."

Though PayPal's fourth quarter included the somber news that eBay plans to transition to a different primary payment processor, PayPal's strong revenue growth, fast-growing engagement on Venmo, and accelerating growth in active customer accounts bode well for the company's long-term prospects.

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