If you were to poll PayPal's (PYPL +1.85%) investors on why they own the stock, one of the key answers would probably relate to the company's growth potential. Since its spinoff from eBay (EBAY +0.13%) in 2015, PayPal has been able to grow sales in excess of 15% every year. But over the past 12 months, it has shown a decelerating revenue growth rate. What gives?
Adjusting growth for M&A activity
As a payments network, PayPal primarily generates revenue by charging fees to send money to merchants online. So it was a little confusing to see it grow transaction volume at a healthy rate but only see revenue grow 13.8% over the last year.
| Metrics | 2017 | 2018 | Last 12 months |
|---|---|---|---|
| Net revenue | $13.1 billion | $15.4 billion | $17.0 billion |
| Revenue growth YOY | 20.8% | 18% | 13.8% |
| Total payment volume | $451.3 billion | $578.4 billion | $676.2 billion |
Source: PayPal financial reports.
The biggest culprit in the lower revenue growth was the sale of its credit card portfolio to Synchrony Financial. For years, PayPal and Synchrony had a partnership whereby Synchrony would provide the operations necessary to run a credit card and PayPal would manage the receivable portfolio and collect the interest. In mid-2018, PayPal decided it no longer wanted to be in the credit card business and sold the loan portfolio to Synchrony for $6.9 billion.
Selling the credit card portfolio meant that PayPal would no longer collect those interest payments, hurting revenue as a result. After adjusting for the lost sales due to this divestiture, its growth in the past year was closer to 20%. Once we are more than one year beyond the sale to Synchrony, year-over-year comparisons will show growth accelerating back to a high-teens rate.
And eBay is bringing down growth, too
For most of PayPal's history, it has been inextricably linked to eBay, serving as the primary means of payment on eBay's marketplace. Therefore, it has suffered when eBay hasn't performed well. Over the past couple of quarters, eBay has seen its transaction volumes decline, which has created a headwind for PayPal.
While this isn't good news for PayPal, the silver lining is that eBay now represents just 8% of PayPal's total transaction volume. Also, the company has disclosed that its non-eBay transaction volumes grew by 30.6% last quarter. In other words, eBay is a headwind for PayPal's overall growth rate, but PayPal's business is still healthy otherwise.
Image source: Getty Images.
A large market opportunity
Despite the recent weakness in PayPal's overall growth rate, there are a lot of things going right at the company. Allowing for the sale of the credit card portfolio and the exposure to eBay, PayPal's growth rate looks much better.
The key driver in long-term growth is the rise of e-commerce and the increasing number of online stores that accept PayPal as a form of payment. It has been focused on growing this list of e-commerce partners and extending its reach into the app economy. For example, you can now use PayPal to order an Uber, stay with Airbnb, order delivery through Grubhub, or buy stuff on Etsy.
Another driver of growth is the boom in person-to-person (P2P) finance, which makes it easier to send small amounts of money to friends or merchants by connecting bank accounts through a platform. PayPal's Venmo is the largest P2P platform in the U.S. and is rapidly growing its user base.
Venmo is not heavily monetized today, but PayPal has been signing up partners to allow people to pay using Venmo, which will enable PayPal to charge merchants transaction fees (similar to how PayPal is monetized). Expect Venmo to drive much of PayPal's future growth.
Looking forward
While PayPal's revenue growth has slowed, there is a good explanation. The stock has retreated a bit after peaking earlier in 2019, but investors may want to use the pullback as a buying opportunity. Long-term growth fundamentals still look favorable, and the prospect of monetizing Venmo could give investors a new reason to buy the stock in the coming years.
