Shares of PayPal Holdings (NASDAQ:PYPL) tripled over the last three years, driven by increasing user engagement and the addition of more than 100 million new customers since separating from eBay in 2015. But the company is only scratching the surface of its potential.

PayPal ended the second quarter with 286 million customer accounts for an increase of 17% year over year. The digital payment provider continues to enter new geographic zones and make new partnerships to spread its brand ubiquity. "We're at the tip of the iceberg in global expansion for us," as CEO Dan Schulman said during the second-quarter conference call last week. 

Here are five reasons I believe PayPal's best days are still ahead.

Someone holds a mobile phone up to a scanning device at checkout.


1. Still growing payment volume more than 20%

The adoption of mobile payments is still in the early innings. Last quarter, PayPal's total payment volume adjusted for currency changes increased by 26% year over year, and it's been growing by more than 20% for several years.

PayPal processed $172 billion in payments in the second quarter alone. Mobile payment volume made up $73 billion of that total, representing an increase of 37% year over year. Given that only 20% of the U.S. population used mobile payments last year, PayPal likely has a long way to go before its growth begins to slow. 

2. Rising engagement

Mobile payment adoption seems to be going through the same stage of growth credit card companies experienced about half a century ago, and of course, Mastercard and Visa are still growing. PayPal customers use their accounts less than once per week, which doesn't seem very frequent compared to the use of cash or credit cards. While engagement continues to increase -- transactions per account were up 9% last quarter -- PayPal is still nowhere close to management's vision of customers using their accounts up to two times per week, or about 100 times per year. 

Venmo is helping PayPal get there a little faster. During the most recent conference call, Schulman said, "Venmo continues its significant momentum and is well on its way to becoming a daily part of our consumers' financial lives." Venmo is a popular peer-to-peer payment app that is seeing explosive growth. It processed $24 billion worth of payments last quarter, an increase of 70% year over year. 

3. Partnerships with leading tech companies

Everything management does is intended to make PayPal the payment platform of choice around the world. The company has already established important relationships with credit card companies and big banks. Now, management is turning its attention to fast-growing e-commerce platforms, such as MercadoLibre and Facebook's Instagram app. 

Through these deals, PayPal can reach millions of new customers who may not have a PayPal account yet. 

4. Margin expansion opportunities

PayPal's non-GAAP operating income increased 22% year over year last quarter, which was faster than revenue. The main driver of this improvement was a decline in non-transaction-related expenses. More specifically, there are fewer calls coming into customer service centers, which is saving PayPal some money. 

Another reason is lower transaction losses as a percentage of revenue. This expense item makes up less than 10% of PayPal's top line. While revenue was up double-digits, transaction and loan losses declined by 4.8% last quarter. This was based on improved risk management and fraud detection, which PayPal is continuing to refine, suggesting that there might be more savings as they improve their capabilities in these areas. 

While one quarter doesn't make a trend, Schulman believes there are "quite a bit more" opportunities to improve margins over time.  

5. Drowning in cash

Last year, PayPal sold its credit receivables portfolio, which freed up a lot of cash that management can now return to shareholders or reinvest for growth. PayPal ended the second quarter with $10.7 billion in cash and investments and generated $1 billion in free cash flow in the quarter alone. Clearly, PayPal is not short of ammunition to invest in the wide-open payments industry. So, what is management's plan with all that cash?

Management has already put some cash to work over the last year with the acquisitions of Hyperwallet, Simility, and iZettle. These deals are significantly increasing PayPal's capabilities in areas like risk-as-a-service and point-of-sale offerings for small merchants. Then there's the $1.25 billion management recently spent to buy stakes in Uber Technologies and MercadoLibre. Investors can expect more deals like these that strengthen PayPal's business in underinvested markets.

PayPal has guided investors to expect between $1 billion to $3 billion in acquisitions each year. Whatever is left over, or about 40% to 50% of annual free cash flow, will be returned to shareholders through share repurchases.

Just getting started

PayPal has the cash, a growing customer base, and a web of partnerships with leading credit cards, banks, and tech giants. It's got margin expansion opportunities and a management team that has pushed all the right buttons to get PayPal to where it is today. All investors need is patience to let compounding do its magic, because it's clear PayPal is just getting started.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.