PayPal (NASDAQ:PYPL) continued its strong growth in its recently reported second quarter. Revenue surged 23% year over year, and earnings per share jumped 29%, driven by gains in new active accounts and payment volume. 

Of course, there's more data and commentary worth mulling over than the headline figures, and much of it came from the company's earnings call. During that call, three particularly interesting topics surfaced: how monetization is progressing on Venmo; management's capital allocation strategy; and how PayPal thinks about competition.

A person using Venmo messaging on a smartphone

Venmo. Image source: PayPal.

Venmo monetization

One unmistakable narrative in PayPal's Q2 earnings call was management's optimism about Venmo. Management noted that the peer-to-peer (P2P) payment app processed $14.2 billion in payment volume during the quarter, up 78% year over year. In addition, the number of net active users on the platform increased to an all-time high.

Active users and payment volume are a great foundation. But investors ultimately want to know the app can be monetized. Naturally, analysts had questions about how well the company's monetization efforts for Venmo were progressing.

In response, management noted that 17% of Venmo users had now engaged in a monetized experience.

 "[O]n the Venmo monetization side, we're certainly still in the early innings there for sure," said COO Bill Ready. "... There's a lot left ahead of us. And to be clear, it's a multiyear journey."


Unlike some of its smaller peers, PayPal's significant scale means the company already has a fat net margin and substantial cash flow. This enables management to put excess cash to work in activities that build shareholder value.

During the earnings call, CFO John Rainey detailed the company's disciplined capital allocation plan for the next three to five years.

On average, we are targeting $1 billion to $3 billion of [mergers and acquisitions] per year, and returning 40% to 50% of our free cash flow to shareholders over that period. We are also committed to optimizing our capital structure, while maintaining an investment-grade rating, balancing inorganic and organic investing with margin expansion, and continuing our strategy to diversify funding sources for our credit business to reduce capital intensity.

Rainey also added that the company just announced a new $10 billion share repurchase authorization, reinforcing PayPayl's "commitment to capital return and disciplined capital allocation to support shareholder value creation."

Driving home how profitable PayPal is, consider its net margin (net income as a percentage of revenue) of 14% compared to mobile payment company Square's (NYSE:SQ) net margin of negative 2.3%.

What about competition?

PayPal's competition looks more formidable than ever. Downloads of Square's P2P Cash App, for instance, recently surpassed those of Venmo. In addition, Square's torrid revenue growth rate has accelerated for five quarters in a row.

When asked about competition, CEO Dan Schulman said the management team respects its competitors and learns from them, but said that PayPal is ultimately focused on its customers. In addition, he said, there's room for more than one winner in digital payments.

I'd say it's obviously not a zero-sum game. Yes, we're operating in what we think is $100 trillion total addressable market which is rapidly digitizing as online and offline is blurring. And we have a very small share of that total TAM.

Of course, this doesn't mean investors should consider competitive dynamics unimportant when evaluating PayPal's prospects. But it is true that PayPal and its peers are all seeing strong momentum simultaneously.