There's been no slowing down PayPal Holdings (NASDAQ:PYPL). The digital-payment provider continues to post robust growth every quarter. Given that the global-commerce market is worth more than $25 trillion, PayPal could grow for decades.
The recent third-quarter numbers certainly show millionaire-making potential. Adjusted revenue was up 21%, while adjusted earnings per share soared 26% over the prior-year's quarter. Driving those gains was total payment volume of $143 billion, which got a boost from mobile payment volume growth of 45% year over year.
PayPal's growth is coming from more people continuing to sign up with PayPal, while current customers gradually use their accounts more frequently. The combination of those two trends increased PayPal's total transactions 27% in the quarter, reaching a total of 9.2 billion transactions over the trailing-12-month period.
Whether PayPal can turn a $10,000 investment into $1 million boils down to how much PayPal can grow its installed user base and how many times per year those customers use their accounts.
Reaching new customers
If PayPal is going to deliver millionaire-making returns, it needs to significantly grow the number of transactions its customers conduct every year. This is because PayPal generates revenue by charging a small fee on every transaction, which means the company's future growth is closely tied to growth in transaction volume.
PayPal's total transactions and total payment volume have been consistently growing at more than 20% per year. The company ended the third quarter with 254 million customer accounts, and these customers used their accounts an average of 36.5 times over the last year, as shown in the following table.
|Metric||Third Quarter 2018||YOY Percentage Change|
|Active customer accounts||254 million||15%|
|Transactions per customer account||36.5*||9%|
|Total transactions||2.463 billion||27%|
|Total payment volume||$143 billion||24%|
PayPal's existing partnerships with credit cards and banks should keep attracting customers who like the idea of being able to use just about any payment method from their PayPal digital wallets. Additionally, management has several buttons it can push to increase the customer base going forward.
One example is PayPal's partnership with Facebook. PayPal already has been integrated into Facebook's Messenger, but one analyst expects the two companies to expand their relationship further by PayPal becoming a payment option in other Facebook apps, such as Instagram and WhatsApp. That could add as many as 60 million new customers to PayPal's platform, according to research firm MoffettNathanson.
There's also potential for PayPal to expand its reach with other partners. PayPal has over 35 partnerships spanning major credit cards, banks, and tech giants. The payment provider recently announced an expanded partnership with Walmart to make it easier for the underbanked to move money around. PayPal also has a relationship with Chevron, BP, and ExxonMobil to make it easier for customers to use their PayPal funds at the pump. These kinds of partnerships should not only keep attracting new customers, but could significantly make PayPal a go-to payment app in the daily routine of its customers.
After signing up new customers, the next step is to get those customers to use their accounts as frequently as possible in order to increase the total transactions processed over PayPal's platform. Management has previously stated the goal is to get customers to use their accounts about two times per week, which would translate to an average of 100 times per year. Currently, customers are using their accounts about once every two weeks. However, as noted by the partnerships with Walmart and energy companies, management's goal could prove conservative.
Let's consider PayPal's Venmo app. This peer-to-peer payment app has experienced tremendous growth, due to the appeal of its built-in messaging system, which makes Venmo similar to a social-media network. Venmo's payment volume in the third quarter rose 78% and is approaching $70 billion in annual volume.
During the third-quarter conference call, PayPal CEO Dan Schulman explained how Venmo's new debit card has been a game changer in getting people to use their accounts for everyday purchases:
Our Venmo card is also off to a strong start with approximately 320% month-over-month growth in monthly active users from August to September. Notably, the two top purchase categories since launch for our card are supermarkets and restaurants. These daily use cases demonstrate how we are rapidly gaining omnichannel ubiquity and becoming a part of our Venmo customers everyday spend.
The everyday engagement trend Schulman described is exactly what investors need to see to earn big returns in PayPal's stock over the long term. PayPal's increasing ubiquity should attract more customers, but the biggest challenge may be growing customer engagement (or transactions per customer account). Concerns about security have been the main obstacle keeping people in the U.S. from using mobile payments more often. However, based on the high engagement happening with Venmo, PayPal may have the engagement problem already solved.
The only issue with Venmo is that the service is mostly free to use, so PayPal is not making much revenue off the service. But management is slowly rolling out new features like Instant Transfer, in which users are charged a small fee to have their money instantly available in a Mastercard or Visa debit card. Venmo processed over $1 billion in instant transfer volume in the month of September alone. Moreover, about 24% of Venmo customers have used a monetizable feature, so the service should contribute more revenue to the company over time.
PayPal has multi-bagger potential
At this point, PayPal just needs to keep executing its current "more choice" strategy, serving the underbanked, and rolling out new features that encourage customers to use their accounts more. That's a formula that has gotten PayPal to where it is, so expect management to continue down that path. Acquisitions also will play a role in allowing PayPal to reach other markets, such as point-of-sale solutions for merchants.
If PayPal continues to expand on its existing partnerships and build on the convenience it already offers through its apps, it's well on its way to becoming a millionaire-maker stock down the road.