Digital payments and financial technologist PayPal Holdings (NASDAQ:PYPL) continues to fire on all cylinders. Revenue rose 29% year over year to $6.03 billion in the first quarter, while free cash flow increased 27% to $1.22 billion. Mobile digital wallets are quickly becoming a staple for consumers around the world, and PayPal's Venmo subsidiary is an important part of its growth trajectory. But just how much is it relying on Venmo? Less than one might think, illustrating just how massive an opportunity still lies ahead for PayPal.  

Venmo's still relatively small payment volume

PayPal reported 392 million active accounts at the end of March (including 14.5 million net new active account additions in the first three months of the year), facilitating global total payment volume (TPV) of $285 billion. Excluding currency exchange rate fluctuations, TPV was up 46% compared to the same period a year ago.  

A woman holding a smartphone and credit card.

Image source: Getty Images.

For many young consumers, Venmo is a hot mobile application -- used to share cash with friends and family and to a lesser extent as a method of transacting business with merchants. There were over 70 million active Venmo accounts in April, making it a small 18% slice of the company's total active customer base. The same goes for TPV. Of the $285 billion processed in Q1, only $51 billion (again at 18% of the total) was handled by Venmo.

However, Venmo's year-over-year TPV growth in the quarter was 63%, outpacing the company's overall average of 46%. Clearly, though Venmo represents a small piece of PayPal overall, this is an important app in the company's long-term growth outlook and is still in the early stages of being monetized. For the record, PayPal said it expects TPV to increase about 30% and revenue about 20% for full-year 2021.  

Merchants, cryptocurrencies, and and a next-gen super app

One area crucial to Venmo's growth is merchant accounts. Merchant services represent the lion's share of PayPal's revenue (at 94% of TPV in Q1), but Venmo was started as a peer-to-peer money sharing platform. Venmo users can send and receive cash on balance in their digital wallets to other accounts for free. But adding business profiles (which can also accept digital cash or payments with linked debit and credit cards for a fee) to the platform will be key to the company reaching its $900 million a year revenue goal. PayPal said it had 300,000 small-business accounts on Venmo at the end of Q1, but considering PayPal overall added some 1.5 million net new merchant accounts overall in the period, Venmo is still early in its efforts here.  

The buying and selling of cryptocurrency like Bitcoin and Ethereum is also a promising realm. Crypto capabilities (as little as $1 worth) were added to Venmo accounts in April, and the company recently completed its acquisition of Curv, a cloud computing infrastructure provider for cryptocurrencies and digital assets. Given the booming consumer demand for digital coins and an increasing number of businesses willing to accept them as payment, Venmo has a new high-growth initiative on its hands.

Integrating money sharing, digital payments, cryptos, and other basic personal finance services into one convenient location has been an area for emphasis at PayPal too, and it reports its next-gen Venmo "super app" (a mobile application that combines multiple features and capabilities) will be released in the third quarter this year. More details will be forthcoming, but management said it's deepening its ability to customize its offerings for users with features spanning e-commerce and digital payments and basic digital banking.  

PayPal is a massive leader in financial technology, but it has plenty of growth left in the tank as it continues to expand around the globe -- especially via its Venmo subsidiary. Shares are reasonably priced at 54 times trailing 12-month free cash flow after the Q1 update, given the steady tailwind filling the company's sails.

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