PayPal (NASDAQ:PYPL) reported its earnings after the market close on Wednesday and, while the results were stronger than expected, the company's forecast left investors wanting more as they drove the stock down in after-hours trading. The devil's in the details, however, and digging a little deeper reveals that while the pain will be short-lived, the opportunity is vast -- and growing.
For the fourth quarter, PayPal delivered revenue of $4.96 billion, up 17% year over year, surpassing both analysts' consensus estimates of $4.94 billion and the high end of management's forecast, which topped out at $4.95 billion. Top-line growth was driven higher by strong account growth and increasing payment transactions. eBay's (NASDAQ:EBAY) transactions continue to decline as a percent of PayPal's total revenue, falling from 26% in 2015 to just 14% today.
Adjusted operating margins continued the expansion we've seen in previous quarters, growing to 23.6%, up 200 basis points from 21.6% in the prior-year quarter. This led to profit growth that was equally robust. PayPal's operating income grew to $800 million, up 34% year over year, resulting in adjusted earnings per share (EPS) of $0.86, up 24%.
Impressive growth in all the numbers that matter
Aside from strong financial results, PayPal continued to build on the operational strength that will drive future growth.
The company added 9.3 million net new active accounts, ending the quarter with a total of 305 million, up 14% compared to the year-ago period. Customer engagement was also on the upswing, as transactions per active account over the trailing-12-month period grew to 40.6, up 10% year over year.
PayPal's payment metrics were strong across the board. The company processed 3.5 billion payment transactions, increasing 21% year over year, and up an impressive 13% sequentially, driven higher by mobile growth. PayPal's One Touch feature is now used by 199 million customers and 14 million merchants. Total payment volume (TPV) -- which is a measure of the total dollar value of transactions processed on the platform -- climbed to $199 billion, up 22% year over year.
Transactions on Venmo continued to outpace the overall business, accounting for $29 billion in TPV, up 56% compared to the prior-year quarter. On the other side of the coin, eBay's TPV continues to decline, shrinking by 4% year over year. PayPal believes transactions from its former overlord will represent just 6% of the company's total TPV by midyear.
"We meaningfully improved and expanded the PayPal platform," said CEO Dan Schulman on the conference call. "We strengthened our value proposition for consumers and merchants, expanded our international scope and scale, and announced transformative strategic acquisitions, investments, and commercial agreements." All that expansion will provide a rich source of growth in the months and years ahead.
Expanding the addressable market will help fuel future growth
PayPal said that recent acquisitions will weigh on earnings during the coming year, particularly in the first quarter, diluting 2020 EPS by $0.68 to $0.70. The biggest impact will be the taxes associated with the acquisitions, including about $0.30 per share related to the acquisition of Honey.
PayPal execs went to great length, however, to lay out the positive impact of acquisitions on its growth story, even as they temporarily stunt earnings growth. Schulman said that in the coming year, "our growth investments are focused on our recent acquisitions, growing our infrastructure in China and other international markets, Venmo monetization, and our in-store point-of-sale initiatives."
He also pointed out that the company's total addressable market had "significantly expanded" as the result of the acquisitions of Honey and GoPay, as well as its commercial partnership with MercadoLibre (NASDAQ:MELI). PayPal is already capitalizing on these opportunities, as early marketing resulted in nearly 100,000 downloads of the Honey app and browser extension. In the coming year, PayPal will invest in its local Chinese infrastructure to expand the relevance of GoPay, while its collaboration with MercadoLibre will allow PayPal users to shop at hundreds of thousands of new merchants across the globe.
A glimpse ahead
PayPal said it expects to add about 35 million active accounts in the coming year, which doesn't include the one-time impact from the Honey acquisition.
The company boosted its full-year guidance from the preliminary view it provided last quarter, increasing both its revenue and earnings forecasts. PayPal now expects 2020 revenue to grow about 19% to $20.9 billion at the midpoint of its guidance, resulting in EPS of about $3.43.
For the first quarter, PayPal expects revenue in a range of $4.78 billion to $4.84 billion, up nearly 17%, producing EPS of $0.77, both at the midpoint of its guidance. To put that into the perspective of Wall Street sentiment, analysts' consensus estimates were calling for revenue of $4.84 billion and EPS of $0.82.
After taking some time to digest the results, PayPal investors have begun to come around. After bidding down the digital payment processor's stock by as much as 6% in after-hours trading, the stock is back near where it was prior to the report's release. PayPal is setting the stage for a massive expansion of its business, and investors should ignore the short-term pain in favor of long-term gains.