After 22 Years In Business, PayPal Is Still Just Getting Started

PayPal's (PYPL -0.27%) performance knocked it out of the park in its most recent quarter and fiscal year. The coronavirus accelerated the move to digital payments, and it's capturing more transactions from more customers than ever before. On a Fool Live episode recorded on March 3, Fool contributors Brian Withers and Matt Frankel discuss the quarter and talk about how this digital payments processor is still just in the early innings of the long-term trend toward a cashless economy.

Matthew Frankel: For sure. Moving on to PayPal, which I would argue had the best quarterly report of all 10 companies on this list, and I'll tell you why in a second. First of all, just a couple of one recent news item that I found really interesting. Everyone knows the cryptocurrency mania is going on bitcoin [is] over $50,000. Every company is jumping into it in some way, PayPal is no exception. We've talked about it before that, you can now buy and sell bitcoin through PayPal and Venmo. They're eventually going to roll it out as a payment mechanism.

Now we hear that PayPal is actually going to buy a crypto-custody firm called Curv. That's one of the latest news items that are doubling down on their cryptocurrency ambitions. I'll save my bitcoin and cryptocurrency ambitions or comments for another segment. But, that could potentially be a needle mover for the business.

As I mentioned, extremely strong earnings report, really not get out of the park. PayPal added 72.7 million active accounts in 2020. There are now 377 million people who use PayPal and/or Venmo, $936 billion total payment volume in 2020, and that grew throughout the year to where now, they have over one trillion dollar run rate of payment volume flowing through their system. That is huge for this used to be just a niche eBay's payment process back in the day. They have grown tremendously. They processed more than 15 billion individual payment transactions last year, 15 billion.

Their earnings grew 31 percent year-over-year. Venmo's revenue grew more than 50 percent, 56 percent revenue growth in payment processing volumes growth in Venmo. Unlike a lot of the big growth stocks we're talking about, PayPal is a highly profitable business, they generated five billion dollars of free cash flow last year. They're expecting similar results for this coming year, they're expecting 19 percent revenue growth, they expect to add another 15 million new active accounts in 2021.

So what I'm watching, I got to say, I am approaching their 2021 forecast with a healthy dose of skepticism. I'm skeptical as to whether their momentum is going to continue after the pandemic goes dies down. Whether people are still going to shopping quite as much on online, whether people are still going to be searching for new ways to send money to their friends and to pay for purchases and etc. I think the Bitcoin thing could help to add some of that 15 million new member projection they're talking about, that will certainly increase engagement on the platform. Until now, that's been a big differentiator of the cash app [from Square] so that you can buy and sell bitcoin, and that's no longer unique to the cash app there.

Also, a few key developments in their business outside of the crypto thing. They recently launched the Venmo credit card, I think that went live in October. That's a product definitely worth watching, watching their buy now, pay later service. A company called Affirm recently went public, that's the leader in the buy now, pay later space. I want to see PayPal really disrupt that. I think Affirm has a $30 billion market cap by itself, I could even be underestimating that.

There's a lot of excitement going on in PayPal's business. The company is really firing on all cylinders. I wish I hadn't sold my shares after the eBay spinoff. I was eBay shareholders and got a chunk of PayPal when they spun the business off. I sold it nearly triple what I got it for, but that's a drop in the bucket compared to where it is now. I bet you Brian is a PayPal shareholder though.

Brian Withers: Oh, no. Rub that in. That was one of the stocks I trimmed over the last two years. Part of why I was worried about PayPal was just all the competition that seems to be out there. It seems to be a new FinTech born every minute, it's in the payments. Square is knocking it out of the park, MasterCard's not given up this fight, and Shopify is doing its own payment system, MercadoLibre and whatnot.

What is PayPal have that is differentiated among these other ones? You can see that it's just far superior platform and it continues to monetize and gain members. To me, the stat that I think about, Matt, you were worried about e-commerce penetration. Q4 in the US, as much as it grew over the past year with COVID, we're still only at 16 percent of retail purchases are done online today, the value.

So I still think we've got a long way to go and PayPal is doing a great job in capturing the market there.

Matthew Frankel: I mean, PayPal's really surprised me. PayPal and Square combined have just really surprised me as in how much those have caught on over the years. I knew that the digital transformation of payments was going to happen. I didn't think it was going to be quite as quick as it is.

Brian Withers: Yeah, that tollbooth model is incredibly lucrative for those companies.