The stock price initially plunged in March at the onset of the pandemic, but as people increasingly turned to using digital payments, engagement across PayPal's core platform and its Venmo peer-to-peer payment app accelerated, and investors took notice.
PayPal started the year posting a modest increase in revenue of 13% year over year, excluding currency changes during the first quarter. But revenue growth accelerated to 25% in each of the last two quarters, with growth in total payment volume reaching a robust 38% in the third quarter.
PayPal's growing user base of 361 million active customer accounts has made it a digital payments juggernaut. Over the course of the year, the company continued its strategy to expand its capabilities and brand ubiquity by introducing new services.
In January of 2020, PayPal completed the $4 billion acquisition of Honey Science, providing consumers online shopping tools that save them money at checkout.
Later in the year, PayPal rolled out its contactless QR code technology, taking a big step to expand its addressable market to in-store payments.
In the short term, eBay (EBAY 1.01%) is transitioning away from PayPal to its own managed payments solution. Management anticipates this headwind to ding fourth-quarter revenue growth by two points, since eBay represents 7% of PayPal's payment volume. But there are opportunities elsewhere to fill the void.
One opportunity is Venmo, which is posting impressive growth and now comprises 18% of PayPal's total payment volume. Management now expects Venmo to contribute $900 million to the company's total revenue in 2021.
What's more, PayPal has demonstrated it can deliver tremendous growth in profits even while reinvesting in marketing, engineering, and technological capabilities to support growth. Adjusted earnings grew 41% year over year in the third quarter, and analysts expect PayPal to grow earnings by 23% annualized over the next five years.