PayPal Holdings Inc. (PYPL +1.24%) shares rose when the company reported its third-quarter earnings earlier this month, and a review of the quarter shows a lot that should please long-term investors. In the quarter, revenue grew to $3.68 billion, a 14% increase year over year, and adjusted earnings per share (EPS) rose to $0.58, a 26% increase over last year's third-quarter numbers. While these numbers are more than respectable in their own right, it should also be noted that the company's top-line growth was negatively affected by 7% due to the sale of its U.S. consumer credit portfolio to Synchrony Financial in July.
PayPal also saw accelerated growth in active customer accounts and user engagement. This quarter, PayPal added 9.1 million user accounts, almost a million more than it added in Q2 (8.2 million). This brings the total number of active accounts to 254 million, good for a 15% increase year over year. And for the first time, account users are using their PayPal accounts more than three times per month. Over the past year, active accounts averaged 36.5 payment transactions, a 9.5% increase in this key metric.
| PayPal Metrics | Q3 2018 | Q3 2017 | Change |
|---|---|---|---|
| Revenue | $3.68 billion | $3.24 billion | 14% |
| Adjusted EPS | $0.58 | $0.46 | 26% |
| Active accounts | 254 million | 220 million | 15% |
| Transactions per active account | 36.5 | 33.3 | 9.5% |
| Venmo payment volume | $16.7 billion | $9.4 billion | 78% |
Data source: PayPal Holdings Inc.
Venmo on the go
One of the things CEO Dan Schulman called out during the conference call was how "especially pleased" he was with the "strong overall momentum" surrounding Venmo, the payments app that has proven to be especially popular with millennials. The growth for Venmo is certainly impressive, and for the third consecutive quarter, Venmo added a record number of new accounts. The app's payment volume rose to $16.7 billion in the quarter, a 78% increase year over year. The best part is that, until recently, Venmo was almost exclusively a peer-to-peer (P2P) payment app -- something that is no longer the case.
Venmo's payment volume this quarter grew to $16.7 billion, a 78% increase over last year's third-quarter total. Image source: PayPal Holdings Inc.
PayPal has begun to roll out a series of initiatives that are slowly beginning to monetize activities on the platform. Schulman said that 24% of Venmo users have now participated in at least one of these activities, up from 17% of users last quarter. When asked if this was finally going to push Venmo toward profitability, Schulman cautioned against expecting anything too quickly, but did state the app was definitely trending toward contributing to, rather than detracting from, the company's bottom line:
On Venmo ... it's hard not to be excited about some of the growth numbers that we're talking about today and the fact that each of the last three quarters we've seen a record number of net new customers come to the platform, but this is a long game. ... [W]e're going to be measured in terms of our approach to this make sure that we optimize for the experience, and profitability will certainly come. ... [S]o that is a transition that will take place in a couple of years, not a couple of quarters. And so we expect to see improvement in our Venmo economics next year and each year thereafter.
The three drivers of Venmo's profitability
Throughout the conference call, Schulman highlighted three ways PayPal was monetizing the Venmo experience: Pay with Venmo, a new debit card, and the instant transfer option on Venmo accounts. Let's take a closer look at each of these to see how these measures can add to PayPal's earnings and the progress being made on each.
Pay with Venmo is the option to use the platform as a payment method when checking out with merchants. The option is especially popular as a payment option on other apps, particularly with Uber and Uber Eats, where Venmo's monthly volume grew a whopping 300% in September over August. Other merchants seeing strong Venmo use were Eat24, GrubHub, and Seamless. Overall, Pay with Venmo grew 185% month over month in September, a staggering increase over such a short time period, proving Pay with Venmo is quickly gaining traction among its core audience of young consumers. Another feature PayPal is just beginning to roll out is adding Pay with Venmo to its Smart Payment Button capabilities, a feature that dynamically presents Pay with Venmo buttons at checkouts of participating merchants.
Earlier this year, PayPal copied a move out of Square's playbook and introduced a debit card for Venmo account users. Schulman said the card was off to a "strong start" and saw 320% month-over-month growth from August to September. The two primary uses for the card were purchases at supermarkets and restaurants. From this, Schulman concluded, "These daily use cases demonstrate how we are rapidly gaining omnichannel ubiquity and becoming a part of our Venmo customers' everyday spend."
Finally, Venmo is seeing a huge demand for the instant-transfer function on its app, processing $1 billion in payment volume in September. After a recent price increase for this capability, Venmo is now collecting 1% on these transfers (with a minimum fee of $0.25).
PayPal is still a buy
Based on the company's trailing-12-month adjusted EPS of $2.28, PayPal sports a P/E ratio of about 37. While that's certainly a high valuation, the company's shares remain a buy. Given the company's strong top- and bottom-line growth, its growing and more engaged customer base, and Venmo's supercharged growth, PayPal looks perfectly positioned to capitalize on the war on cash and the push to digital payments.
