When PayPal Holdings Inc (NASDAQ:PYPL) reported its fourth-quarter results earlier this month, most of the analysis focused on its pending breakup with eBay Inc. (NASDAQ:EBAY). PayPal shares pulled back and are now down more than 12% from the day before it reported earnings. Now it's up to investors to determine if this dip is an opportunity to buy shares at a discounted price.
Make no mistake: eBay makes up a good deal of PayPal's business and, in PayPal's conference call, management stated that eBay represents about 13% of its current total payment volume. That number, however, is steadily decreasing every year and the current deal is intact through mid-2020 -- meaning the loss of eBay will undoubtedly have much less impact than it would if it were to happen today. PayPal will also remain as a payment option on the eBay site through at least 2023.
With that being said, there are plenty of other reasons to be optimistic about PayPal's long-term outlook. Let's take a closer look at what's going on with the company to determine if this is indeed a buying opportunity.
More new users and increased engagement
What cannot be denied is that PayPal continues to grow at a rapid. This quarter, active customer accounts grew to 227 million, a 15% increase year over year. Even better, these customers are using their accounts more often. This quarter, the payment transactions per active account over the trailing 12 months rose to 33.8, an 8% increase year over year. These two metrics might be more important to PayPal's future than any other numbers besides its revenue and earnings growth, as they show more customers coming onto the platform and existing customers using the platform more frequently.
And these numbers might be even better than they look. In the company's fourth-quarter conference call (transcribed by S&P Global Market Intelligence), CEO Dan Schulman explained:
I think it's instructive to note that our accelerating net new active growth hides the true underlying growth of engagement. If our total net new adds had grown at the same rate as last year, our growth and engagement would have increased 11% to approximately 34.5. It's particularly encouraging that our net new active cohorts acquired in 2017 are showing an acceleration in engagement versus similar cohorts from 2016. The net takeaway is we're bringing on record net new actives with higher engagement than ever before, and that obviously bodes well as we look ahead.
The mobile commerce winner
Mobile commerce is expected to reach 45% of total e-commerce sales by 2020, good for about $284 billion, according to Business Insider. Mobile commerce refers to any origination of a purchase made from a mobile device. Fortunately for PayPal shareholders, the company continues to excel in this growing area of commerce. This quarter, the company processed $48 billion in mobile payment volume, a 53% increase year over year. This equaled about 36% of PayPal's total payment volume.
Management continues to credit its One Touch platform for providing its users with "fast, frictionless, and engaging" mobile shopping experiences. Once a device is registered with the platform, customers can purchase a product from merchants with literally one touch. This eliminates the need for consumers to have to retrieve their credit cards at inopportune times or enter cumbersome information (e.g. shipping addresses and credit card numbers) on tiny smartphone screens. This quarter the number of consumers enrolled with One Touch more than doubled to 80 million, and merchants supporting the platform rose 60% to 8 million.
Don't forget about Venmo
We can't discuss the future of PayPal without mentioning Venmo, the social payment platform so popular with millennials. This quarter, for the first time ever, the app processed more than $10 billion in payment volume, an 86% increase year over year. Schulman stated that Venmo "experienced another very strong quarter of net new adds" and saw "the largest cohort of annual net new actives ... in its history."
Additionally, it appears the launch of Pay with Venmo, the effort to have Venmo accepted as a method of payment at millions of retailers, is going extremely well. Speaking on this matter, Shulman said:
While we are still in the early stages of [monetization], we are very encouraged by our initial leads on engagement. In fact, the adoption of services that we are able to monetize on Venmo is tracking above the P2P adoption Venmo experienced at a similar point in its history. Given our experience this past year, we believe our future opportunities are expansive and compelling.
Make no mistake, losing eBay was a blow. That being said, the long-term thesis for buying PayPal remains intact:
- The company is adding more new users who, in turn, are using the platform more than ever before.
- It continues to dominate mobile commerce, a consumer trend destined for greater growth.
- Venmo continues to grow at a rapid pace and is just beginning its journey to monetization.
Is this dip a buying opportunity then? Sure, just be sure to recognize it for what it is. Most would still not consider the shares a screaming bargain. With non-GAAP earnings per share over the trailing 12 months of $1.91, shares still trade at a steep price-to-earnings ratio of 39.1. Although that's better than where the company was valued before the eBay news broke, just be aware that most still seem to recognize the company is looking at a potentially very bright future.
That being said, to paraphrase my favorite Warren Buffett quote, PayPal seems to be a wonderful company going for a fair price. If I didn't already own shares, I would happily initiate a position here and look for better valuation entry points to continue adding to it. PayPal is simply riding too many powerful trends to stay down for long.