Please ensure Javascript is enabled for purposes of website accessibility

PayPal Continues to Execute but Gets Put on Notice

By Danny Vena - Feb 10, 2018 at 11:35AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

PayPal reported impressive earnings, but eBay managed to steal its thunder.

For a while, it seemed PayPal Holdings, Inc. (PYPL -2.16%) could do no wrong. The digital payments company has been enjoying an impressive run, with its shares more than doubling over the last year.

PayPal reported its financial results after the market closed on Wednesday, exceeding analysts' expectations on both the top and bottom lines. Unfortunately, the forecast it provided for the coming year was not as robust as investors had hoped, causing the stock to fall after closing near all-time highs. In addition, an announcement by longtime partner eBay (EBAY -2.67%) took investors by surprise, causing the sell-off to accelerate.

PayPal logo outside its HQ building.

eBay's announcement overshadowed PayPal's impressive earnings. Image source: PayPal.

Impressive growth continues

For the just completed fourth quarter, PayPal's revenue grew to $3.74 billion, an increase of 26% year over year, and also 26% on a constant currency basis. This showing exceeded the high end of the company's forecast in a range of $3.57 billion to $3.63 billion, while beating analysts' consensus estimates of $3.63 billion. 

PayPal reported net income of $620 million, which grew 59% over the prior-year quarter, though those results were skewed by several one-time adjustments. GAAP earnings per diluted share grew 57% to $0.50, which adjusted for one-time gains and costs would have been $0.55 per share, beating analysts' expectations of $0.52 per share.

PayPal had two one-time items that affected its results. During the quarter, PayPal agreed to sell $5.8 billion in consumer loans to Synchrony Financial (SYF -0.71%). Revaluing this transaction because of the proposed sale resulted in an increase of $0.25 to its GAAP earnings per share. The recently enacted tax legislation also complicated matters, resulting in a one-time tax charge of $180 million, which reduced GAAP earnings per share by $0.15. 

Increasing user base

PayPal continued to scale its user base, adding 8.7 million active customer accounts during the quarter, up 61% year over year, and growing to 227 million.

PayPal's payments continued their impressive growth, up 25% year over year to 2.2 billion transactions. Customer engagement also grew, increasing to 33.6 transactions per active customer account over the trailing-12-month period, up 8% over the prior year.

The company processed $131 billion in total payment volume (TPV), up 32% year over year, or 29% on a currency-neutral basis. Mobile engagement continued to climb, as approximately 37% of TPV, or $48 billion, originated on mobile devices, up 53% year over year.

Person-to-person (P2P) payment volume accelerated to $27 billion, up 50% year over year and accounting for a full 20% of TPV in the fourth quarter. Venmo, PayPal's P2P social payments platform, processed $10.4 billion during the quarter, an 86% year-over-year increase, and surpassing $10 billion in quarterly payments for the first time.

Continued expansion, but a loss...

The company reviewed several noteworthy events that transpired during the quarter. The previously mentioned sale of $5.8 billion in consumer loans to Synchrony Financial is subject to regulatory approval and is expected to close in the third quarter of 2018.

PayPal launched domestic operations in India, after offering cross-border payments for nearly a decade. The market presents a large opportunity for the company, as 60% of all e-commerce orders in the country are paid cash-on-delivery. 

The big news didn't come from PayPal, however, but from longtime partner eBay, which announced it would begin to "intermediate" the payments on its platform with the help of PayPal competitor Adyen. PayPal will remain a payment option on eBay's marketplace until July 2023, but Adyen will begin processing transactions for eBay in North America this year and will be handling the majority of the company's payments by 2021.

Transactions from eBay represented 13% of PayPal's TPV for the quarter, down from 16% in the prior-year quarter, and has been a declining part of PayPal's total business. PayPal CEO Dan Schulman played down the situation, saying the loss of eBay's business would be "quite manageable."

Looking to the future

For the first quarter of 2018, PayPal expects to grow revenue in a range between $3.58 billion and $3.63 billion, producing GAAP earnings between $0.41 and $0.43 per share.

While the pending break with eBay may present some short-term challenges, PayPal's impressive growth will more than make up for the declining business its former parent represents. PayPal has shown that it can deliver the goods, and any immediate decline in the share price appears to be a buying opportunity.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

PayPal Holdings, Inc. Stock Quote
PayPal Holdings, Inc.
$76.00 (-2.16%) $-1.68
eBay Inc. Stock Quote
eBay Inc.
$44.45 (-2.67%) $-1.22
Synchrony Financial Stock Quote
Synchrony Financial
$29.33 (-0.71%) $0.21

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/27/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.