Expectations were high going into PayPal's (NASDAQ:PYPL) fourth-quarter financial release. The digital payment processor was rolling into the end of a banner year, exceeding its forecast and raising guidance in each of the three previous quarters. Investors have come to expect the "beat and raise" from PayPal, so when the company again exceeded its forecast for the quarter, you'd think that would be cause for celebration.
Not so, as the stock initially fell nearly 6% in the wake of its earnings, before regaining some ground and ending up down about 4% for the day. Let's look at the results, why investors weren't happy, and why I think they're wrong.
For the just-completed fourth quarter, PayPal reported revenue of $4.23 billion, up 13% year over year, and topping the high end of the company's guidance. The results include a 7% revenue adjustment -- similar to last quarter -- related to the sale of receivables to Synchrony Financial (NYSE:SYF). Adjusted operating margins of 21.6% were statistically similar to last year, resulting in diluted earnings per share of $0.69, up 26% year over year, and topping the high end of the company's estimates of $0.67.
Plenty to like
PayPal had plenty of operational metrics that supported its financial success.
The company added 13.8 million net new active accounts, an increase of 59% year over year. It's important to note this included 2.9 million new accounts from its recent acquisitions of Hyperwallet and iZettle. But even adjusting for those, organic new accounts of 10.9 million represented growth of 25% versus the prior-year quarter. All in, the company ended 2018 with 267 million customer accounts, up 17% year over year.
PayPal is benefiting not only from a growing base of customers, but also by increasing customer engagement. Transactions per active account over the trailing 12-month period grew to 36.9, up 9% year over year. The number of payment transactions continues to soar, growing to 2.9 billion, up 28% year over year, and up 16% sequentially, driven higher by the addition of new customers and greater activity by existing users.
Total payment volume (TPV) -- which represents the total dollar amount of transactions taking place on the platform -- continue to spike higher, reaching $164 billion, up 23% versus the prior-year quarter, or 25% when adjusted for changes in foreign exchange rates.
Person-to-person (P2P) payments continued their growth unabated, up 46% year over year and topping $39 billion. P2P now accounts for 24% of TPV. A large part of that growth is the result of the continuing success of Venmo, which grew 80% year over year to $19 billion in TPV.
The trend of increasing mobile engagement continued to augment PayPal's growth, contributing about $67 billion in mobile payment volume, up 40% year over year, and now accounts for 41% of TPV.
A quick look back
eBay (NASDAQ:EBAY) made plenty of headlines early last year, when the company decided to process its own payments. PayPal investors feared that this could potentially hurt the company, but as I pointed out at the time, eBay represents a declining part of PayPal's growing business. Looking back now, that continues to hold true, as eBay's marketplace volume was flat year over year, but represented just 10% of PayPal's TPV, down from 13% in the year-ago quarter. eBay's decision may come back to haunt it, as a recent survey shows some customers are abandoning transactions when the option to pay with PayPal isn't available.
What the future holds
PayPal's stock fell in the wake of its otherwise impressive report, ending the day down by nearly 4%. So what caused the sell-off? In a word: expectations.
For the upcoming first quarter, PayPal forecast revenue in a range of $4.08 billion to $4.13 billion, up between 11% and 12% year over year. This fell short of analysts' consensus estimates of $4.16 billion, which is likely the cause for the falling stock price. PayPal is also projecting adjusted EPS in a range of $0.66 to $0.68, in line with analysts' expectations for $0.68.
This is where I think the market got it wrong. PayPal has been conservative in its projections in each of the past four quarters, then exceeded its forecast and raised its guidance. I would much rather have management underpromise and overdeliver, than the other way around.
PayPal's conservative guidance notwithstanding, the company continues to deliver on all the metrics that matter. Investors should focus on the massive road ahead and hang on for the ride.