PayPal (NASDAQ:PYPL) beat earnings and revenue expectations this past quarter, according to its second-quarter report released Wednesday. Despite the coronavirus pandemic and its adverse effects on the economy, the payments giant reported its "strongest quarterly performance in PayPal's history."
However, the same conditions that boosted PayPal's earnings this quarter (as well as its stock price) could slow growth whenever COVID-19 eventually recedes. So while this performance surprise should help boost the fintech stock in the near term, it could also give rise to uncertainty as PayPal prepares to enter a post-pandemic world.
PayPal's second quarter
This is the first quarter fully impacted by the pandemic. Hence, PayPal shareholders finally saw what affect COVID-19 has had on the company.
PayPal's net revenue for the quarter was $5.26 billion, a 25% increase year over year. This helped non-GAAP net income rise to $1.07 per share, $0.20 per share ahead of estimates and a 49% increase year over year.
Moreover, the company not only reinstated full-year guidance, but it also raised its outlook. PayPal now expects approximately 22% revenue on a currency-neutral basis and earnings-per-share growth of about 25%.
CEO Dan Schulman compared payment volumes during the quarter to those seen the weekend after Thanksgiving. The company added 21.3 million customers sequentially. And Honey, a PayPal service offering coupons and deals, experienced growth in net new active users that nearly tripled Q1 levels.
Rather than the pandemic harming PayPal, COVID-19 might have helped facilitate the deployment of its QR code technology in 28 markets globally. This system allows touch-free payment via smartphone apps at retail chains like CVS for buying and selling in person. Both PayPal and its cash app, Venmo, can utilize this feature.
Where this report leaves PayPal
However, this could become both good news and bad news for PayPal. The Q2 results mean PayPal stock will probably continue the move higher that began in March. Also, considering that there's no end in sight to pandemic-related restrictions, these conditions could continue for the foreseeable future. However, at some point, the effects of COVID-19 will fade, and the world will return to its pre-pandemic spending habits.
Grandview Research forecasts a 17.6% compound annual growth rate in the global digital payments market through 2025. Given the rapid growth rate, investors should not expect revenue or earnings to fall. However, they could see a significant year-over-year slowdown in growth next year as conditions return to normal.
Additionally, PayPal's closest peers, especially Square (NYSE:SQ), could see something similar. For now, Square does not have the worldwide reach of PayPal, which is currently available in more than 200 countries.
However, Square operates the Cash App, the most prominent direct alternative to Venmo. Venmo functions as a sort of "social media of money," allowing users to add emojis or share activity with friends. This stands in contrast to the Square Cash App, which facilitates transactions with more anonymity.
Venmo experienced a 52% increase in total payment volume year over year. This could bode well for Square and its Cash App. However, it could significantly raise expectations as the two companies battle for supremacy in the cash space.
PayPal after earnings
PayPal investors should expect a near-term benefit from this report. Also, with no end in sight to the pandemic, investors should expect this growth to continue in the near term. Nonetheless, the pandemic will end eventually, and increased activity now may lead to slower growth once society lifts restrictions.
However, investors should remember both the recent numbers and the 24.2% average annual earnings increases that PayPal has seen over the last five years. They should also keep forecasted industry growth in mind.
Both past and forecasted growth indicate that even if profit growth slows as the pandemic ends, double-digit earnings increases should return in the future. This should leave enough room for PayPal stock to continue benefiting from an increasingly cashless society.